-^ijmmt^'^'t. mh INANCE
■■/:
'-;j'ii*' i'
- '^■■.-:'i •■•• K^ .-- . , ^
LIBRARY
OF THE
UNIVERSITY OF CALIFORNIA.
/
Class
Digitized by the Internet Archive
in 2007 with funding from
- IVIicrosoft Corporation
http://www.archive.org/details/commercefinanceOOpowerich
Commerce and Finance
Designed as a Text Book for Schools and
a Volume of Business Information
for the General Reader.
By O. M. POWERS
Principal of the Metropolitan Business College
Author of The Complete Accountant, Etc,
CHICAGO:
Powers & Lyons
4
CINERAL
Copyrighted 1903
BY
POWERS & LYONS
PREFACE
As a consequence of the diffusion of general intelligence, the
improvement in means of transportation, and the rapid transmis-
sion of information, the business world of to-day is more highly
organized, its interests more intimately connected and interwoven,
and its methods more complex and intricate than ever before. To
meet present conditions the successful business man of to-day must
possess a broader and more intelligent view, as well as a readier
comprehension of all those problems which enter into business life.
He must be conversant in a degree with the operations, silent
though powerful, going on about him. In short, he must be better
educated. In the preparation of this book the aim has been to bring
together a mass of important facts and information of a business
nature not found in books generally, or not found in concise, tang-
ible or logical form, and present the various subjects so clearly
that the ordinary reader or student may readily grasp them.
The book is a combination of history and economics. It relates
to both the past and present. In the first 146 pages of the book,
embracing a history of commerce and of banking, a foundation is
laid for the proper consideration of the subjects which follow. In
dealing with historical facts we have aimed to show why commerce
flowed in certain channels at certain times and the influences which
have affected its progress and development. In the discussion of
the various subjects which follow, the aim has constantly been to
reach the basic principles underlying each, to discover the theories
upon which business is done. Necessarily the subjects could not be
treated in exhaustive detail in a work of this size, but the most
important features are set forth, and a basis is thus furnished for
5 ^
6 PREFACE.
those who wish to pursue any special line of study farther into its
details and intricacies.
The author gratefully acknowledges himself indebted for valu-
able assistance and suggestions in the preparation of this work to
Mr. Fred W. Gookin, formerly cashier of the Northwestern National
Bank of Chicago; Mr. F. H. Rawson, Vice-President Union Trust
Co., Chicago; Mr. H. P. Simonton, Corporation Attorney; Mr. C. S.
Pellet, Ex-President Chicago Board of Underwriters; Mr. J. H.
Emerson, General Agent New Tork Life Ins. Co.; Mr. Chas. D.
Snow, of the Chicago Board of Trade ; Mr. W. E. Ray, of the Chicago
Journal; Mr. B. J. Fitzgerald, Real Estate Broker; Mr. John F.
Scanlan, of the Custom House; Mr. W. A. Douglass, Manager of
R. G. Dun & Co., Chicago; Mr. John E. Gardin, Manager Foreign
Exchange Department First National Bank, Chicago, and many
others, and yet these gentlemen are in no way responsible for any
possible errors or inaccuracies of statement that may appear in this
book.
O. M. P.
Chicago, September 1, 1903.
CONTENTS
HISTORY OF COMMERCE
PAGE.
I. ANCIENT COMMERCE.
Origin of Commerce — Egyptians — Phoenicians— Greeks, 13
II. ANCIENT COMMERCE— Continued.
The Carthaginians — The Roman Empire, ..... 19
III. MEDIEVAL COMMERCE.
Decline and Fall of Rome — ^Decay of Commerce — Con-
fusion and Ignorance — Charlemagne — Venetian Com-
merce, 27
IV. MEDIEVAL COMMERCE— Continued.
Decline of Venice — Commerce of Genoa, Florence and
Pisa— Effect of Discovery of America, 36
V. MODERN COMMERCE.
The Cape Route to India — Portuguese Commerce —
Spain's Vast Possessions — Expulsion of the Moors-
Dutch Commerce, 46
VI. COMMERCE OF GERMANY.
Hanseatic League — Effect of Thirty Years' War — Revival
of German Commerce — Zollverein — Present Commerce, 56
VII. COMMERCE OF FRANCE.
Flemish Commerce and Manufactures — Age of Louis
XIV — Colonial Possessions — Revocation of the Edict of
Nantes 64
VIII. COMMERCE OF FRANCE— Continued.
Colbert — John Law — The French Revolution — Napo-
leon's Policy — Recent French Commerce, ... * . 72
IX. COMMERCE OF ENGLAND.
Before the Roman Conquest — English Wool — Eliza-
beth's Policy — Carrying Trade, 81
7
8 CONTENTS.
X. COMMERCE OF ENGLAND— Continued. page.
Manufacturing — Postal System — Banking — Speculation
—Colonial Policy 93
XI. COMMERCE OF THE UNITED STATES.
Colonial Period— Financial Policy— War of 1812, . . 106
XII. COMMERCE OF THE UNITED STATES— Continued.
Revival of Manufacturing — Tariff Laws— Slavery — Civil
War, 119
XIII. COMMERCE OF THE UNITED STATES— Continued.
Growth of Industries — Inventions and Discoveries —
Foreign Trade, 132
MONEY.
XIV. NATURE AND USE OF MONEY.
As an Element in Civilization — Kinds — Barter — Essen-
tials of Money, .....* H7
XV. FUNCTIONS AND KINDS OF MONEY.
Four Functions — Subsidiary Coin — Comparative Value
of Silver and Gold — Demonetization of Silver, etc, • . 153
XVI. THEORIES OF MONEY.
Coinage — ^Volume of Money — Substitutes — Monometal-
lism— Bi-Metallism, ...161
HISTORY OF BANKING.
XVII. PRIMITIVE BANKING.
Bank of Venice — Amsterdam Wisselbank — Bank of
France — French System, 168
XVIII. ENGLISH BANKING.
Bank of England — Peel's Act, 1844 — One Reserve-
Banking and Issue Departments, 178
XIX. ENGLISH MONEY SYSTEM.
Bank of England — Immense Responsibility as Keeper
of the Reserve — Bank Rates — Management 187
XX. GERMAN BANKING.
Reichsbank — Elasticity of German Currency — Stability
— Russian Banking 196
XXI. SCOTCH AND CANADIAN BANKING.
Scotch System — Branch Banks — Canadian System —
Asset Banking — Elasticity . 204
CONTENTS. 9
XXII. BANKING IN THE UNITED STATES. page.
Colonial Period — Bank of North America — Hamilton's
Views— First United States Bank— State Banks, . . .218
XXIII. BANKING IN THE UNITED STATES— Continued.
Second United States Bank— The Great Bank War —
Suffolk Bank System— Safety Fund System— Wild Cat
Banking, 225
XXIV. BANKING IN THE UNITED STATES— Continued.
National Banking System — Organization — Reserve —
Circulation — Sub-Treasury System 233
XXV. BANKING IN THE UNITED STATES— Continued.
State Banks —Private Banks — Savings Banks — Trust
Companies 244
XXVI. BANKING IN THE UNITED STATES— Continued.
The United States Treasury 252
BANK CLEARING HOUSE.
XXVII. SETTLEMENTS BETWEEN BANKS.
History — Objects — Methods — Clearing House Certificates, 262
BORROWING AND LENDING MONEY.
XXVIII. THE USE OF CREDIT.
The Money Market — Call Loans — Collaterals — Note
Brokers 271
CORPORATIONS.
XXIX. CHARACTER OF CORPORATIONS.
Formation — Promotion — Kinds of Stock —Watering
Stock— Dividends 282
XXX. CORPORATIONS— Continued.
Directors— Duties of Officers — By-Lavvrs— Records, , . 293
XXXI. CORPORATIONS— Continued.
Subsidiary Corporations— Control and Manipulations, . 300
XXXII. CORPORATIONS— Continued.
Combinations — Trusts — Promotion — Underwriting, . . 305
XXXIII. CORPORATIONS— Continued.
Receiverships — Reorganizations, 313
10 CONTENTS.
BONDS. PAGE.
XXXIV. GOVERNMENT AND CORPORATE OBLIGATIONS.
Kinds— Refunding— Negotiating — ^Foreclosure, . . . 319
SECURITES AND INVESTMENTS.
XXXV. BONDS, STOCKS AND MORTGAGES.
Governments— State and Municipal — Kinds of Mortgage
Securities, . . . . • 328
COMMERCIAL CREDITS.
XXXVI. OUR CREDIT SYSTEM.
Assets — ^Losses — ^Limit of Credit — Machinery of Credit, 336
PURCHASE AND SALE OF REAL ESTATE.
XXXVII. LANDED PROPERTY.
Titles — ^Values — Ninety-Nine Year Leases — ^Mortgages, 345
FIRE INSURANCE.
XXXVIII. INDEMNITY FOR LOSS BY FIRE.
History — Classes of Companies — Risks — ^Rates, . . . 354
XXXIX. FIRE INSURANCE— Continued.
Boards of Underwriters — Co-Insurance— Losses, . . . 363
LIFE INSURANCE.
XL. INDEMNITY AGAINST MISFORTUNE.
History — Methods — Kinds of Companies — Kinds of
Policies 370
XLI. LIFE INSURANCE— Continued.
Premiums — Dividends — Loans— Annuities— Assessment
Insurance, 378
THE STOCK EXCHANGE.
XLH. DEALING IN SECURITIES.
Incomes — Investments — Speculation — Gambling in
Stocks, 384
XLin. THE STOCK EXCHANGE— Continued.
Brokers — Bolls and Bears — Listing Securities, . . . 393
CONTENTS. 11
THE PRODUCE EXCHANGE. page.
XLIV. BOARDS OF TRADE.
Character— Organization — Members — Benefits to Public, 400
XLV. THE PRODUCE EXCHANGE— Continued.
Cash Grain — Futures — Inspection — Bucket Shops, . . 407
STORAGE AND WAREHOUSING.
XLVI. BONDED, PRIVATE AND COLD STORAGE WARE-
HOUSES.
Importation of Goods— Classes of Bonded Warehouses—
Restrictions — Cold Storage System, 416
TRANSPORTATION BY RAIL.
XLVII. RAILROADING.
Railroad Ownership — Capitalization — Traffic Associa-
tions—Pooling—Differential Rates, Etc., 423
XL VIII. TRANSPORTATION BY RAIL— Continued.
Classification of Freight — Freight Rates — Cost of Serv-
ice, Etc 432
FOREIGN COMMERCE
XLIX. TRADE RELATIONS WITH FOREIGN COUNTRIES.
Duties— Reciprocity — Bounties — Subsidies — Naval Pro-
tection 438
L. FOREIGN COMMERCE— Continued.
International Law — Treaties — Consular Service — Foreign
Exchange, 445
FOREIGN EXCHANGE.
LI. INTERNATIONAL SETTLEMENTS.
Interchangeable Values — Mint Parity — Arbitrage — Gold
Shipments, 452
LII. FOREIGN EXCHANGE— Continued.
Instruments of Exchange — Quotations — The Arithmetic
of Exchange, • 460
HISTORY OF COMMERCE.
CHAPTER I.
ANCIENT COMMERCE.
ORIGIN OP COMMERCE; EGYPTIANS; PHOENICIANS; GREEKS.
The history of commerce is the history of civilization. In
his barbarous state man's wants are few and simple, limited to
his physical existence, such as food, clothing and shelter, but
as he advances in the scale of intelligence his wants
wa'nts" increase and he requires not only the comforts and
conveniences of life but even the luxuries. Civil-
ized man is never satisfied, for no sooner is a want supplied
than another arises in its place, and under that stimulus he
achieves mighty conquests over the forces of nature and attains
to a high degree of development in character. Commerce is
one of the means by which various peoples have at different
times undertaken to supply their needs.
No civilized community produces all the things which it con-
sumes. A portion of its needs must be supplied by an inter-
change of products with other communities or nations and
this is the beginning of commerce, either domestic or foreign.
Moreover, it may be impossible for a nation to produce all that
it needs to consume, owing to physical peculiarities of the
country, its lack of coal, wood, or ore, its climate, etc. Thus
England cannot grow sufficient corn to feed its
PureiS'"* people, but it manufacturers more cloth than
is necessary to clothe them. A warm country
cannot grow wheat successfully, but it may produce cotton or
rice in abundance.
13
14 HISTORY OF COMMERCE.
Commerce also depends in a measure upon the national skill
of a people in the manufacture of commodities. The Swiss have
long been noted for the manufacture of clocks, watches, and fine
lace; the French for the production of wine and
EmXyments ^^^^' -A-Hother uatiou may be deficient in both the
possession of natural products and skill as manu-
facturers, but have peculiar skill as navigators, and become the
carriers of goods. Such were the Italian cities which, in the
middle ages, grew opulent from the profits of the carrying trade.
Then again a nation may combine all three of these functions,
and become producers, manufacturers and carriers in a greater
or less degree, reaping a profit from each, as the principal nations
of Europe, and the United States are doing at the present time.
The ancient commerce of the world was carried on chiefly
upon the shores of the Mediterranean Sea. When we read in
Genesis that Joseph was sold by his brethren for twenty pieces
of silver to "a company of Ishmaelites come from
Egypt*'^*^'^ ° Gilead with their camels bearing spicery and balm
and myrrh, going to carry it down to Egypt," we
get a glimpse of the ancient commerce of that oldest of empires,
Egypt, drawing supplies from the thrifty nations to the east of the
Mediterranean. Caravans of camels laden with goods and silver
crossed the desert and carried into Egypt wool, ivory, gold-dust,
spices and slaves from Arabia and the far east. In exchange
Egypt furnished large quantities of wheat, barley, rice, cotton
and flax from the fertile valley of the Nile, besides quantities of
linen, and cotton cloth, as well as utensils and pottery. From
the nature of the conditions, Egypt has always been essentially
an agricultural country. The broad, level valley of the Nile,
enriched annually by the overflow, yielded abundant crops, and
the people were apparently content with their harvests, devoting
themselves but little to manufacture or commerce. The sea
coast was low, with no good harbors, thus uninviting to com-
merce, while a scarcity of wood made ship-building a practical
THE PHOENICIANS. 16
impossibility. The Egyptians cultivated the arts and sciences,
and their kings busied themselves in erecting those wonderful
monuments in the form of tombs, which still remain to a con-
siderable extent. Although industrious at home, they did not
see^m inclined to go abroad or engage in foreign trade, and this
was carried on chiefly by Arabs and Greeks. After the con-
quests of Alexander the Great, the port of Alexandria became the
great commercial metropolis of the world, and Greek merchants
settled there in large numbers.
The first navigators and carriers of goods by water, of which
we read, were the Phoenicians who inhabited the narrow strip
of coast land along the east of the Mediterranean
Phoenicians ^^^' Having a large sea frontage with little inte-
rior distance, these people were naturally attracted
to seafaring occupations. Their coast abounded in good har-
bors, and their abundant forests supplied the materials for ship
building, while agriculture was difl&cult on account of the hilly
and rocky nature of the land. Here we see the natural con-
ditions exactly reversed from those of Egypt, with the effect of
developing a nation of navigators and traders instead of farm-
ers, as in Egypt. The enterprise and activity of the Phoenicians
were wonderful. They founded the cities of Tyre and Sidon
and built up a large and profitable system of commerce. In-
tellectual activity and diligence in business led these people to
many discoveries, among which were the making of glass,
the art of dyeing purple and writing by means of letters. They
were also distinguished by their skill in casting metals, weaving,
architecture and in various other directions. Sidonian garments,
Tyrian purple, Phoenician glass and articles of ivory, gold and
other metals were precious and coveted wares in all antiquity.
The forests of Lebanon, along the eastern border, supplied them
with material for ship-building, and with their oared barks they
navigated the coast and islands of the sea, trading in their own
productions and those of the far east, spices, frankincense, oil.
16 HISTORY OF COMMERCE.
wine, wheat and slaves. They made their way along the coast,
and out as far as Cyprus, where they founded a colony, then to
the islands of the Aegean Sea and Greece to the north, and to
Egypt and Africa in the south. They ventured
B. c. 1050 west as far as Spain, which they found rich in
minerals, especially silver. The discovery of Spain
with its rich mines brought immense wealth to the Phoenicians,
and they proceeded to develop the resources of the country with
vigor. It is said that the Phoenicians drew such vast wealth
from the mines of Spain that their ships carried silver anchors.
Besides silver they received from Spain considerable quantities
of tin, lead, iron and even gold, as well as a large yield of wheat,
wine, oil, wax, fruit and fine wool.
The Phoenicians used their possessions in Spain as a basis
for trading voyages farther west. They passed the straits of
Gibraltar and went northward among the British isles, where
they obtained large quantities of tin. Proceeding still farther,
they entered the Baltic Sea, and visited the rude people in north-
western Europe, purchasing wool, hides, furs, copper
Voyage"^" and othcr metals, and giving in exchange their own
manufactures, such as purple dyed robes, carpets,
and fine cloths, works in gold, silver, ivory, amber and glass.
The Phoenicians imported largely raw materials, which they
made up in Tyre and Sidon, and then exported the finished
product either by their own ships seaward or by caravans to the
east. Thus they were a manufacturing as well as a maritime
nation. They are said to have rounded the Cape of Good Hope
on voyages to India about the year B. C. 600.
This enterprising people became not only masters of the
Mediterranean Sea, but were instrumental in scat-
of Civilization tcriug the gcrms of taste and intelligence, elevat-
ing the standard of civilization and establishing
a system of commerce throughout a large portion of the an-
cient civilized world. They no doubt learned the use of gold
THE GREEKS. 17
and silver as money from the Babylonians, but they introduced
and popularized the use of these metals as money throughout the
Mediterranean by stamping and issuing coins of both metals in
various sizes and denominations. The ratio of silver to gold in
value at that time was about 13 to 1. The Phoenicians also in-
troduced into commerce a regular system of weights and meas-
ures, and the use of bills of exchange, as a means of payment.
But owing to troublesome wars and confusion caused by the
contests between the Babylonian and Assyrian empires about the
eighth century B. C. the commerce of Phoenicia
The Greeks began to decline, and after the conquest and de-
struction of the cities by the Greeks under Alex-
ander the Great, including Tyre, by the celebrated siege which
lasted seven months (B. C. 332), the commerce of this once
energetic people passed over to the Greeks, who were then a
dominant nation in the arts and sciences. The Greeks were
not essentially a commercial people, being more devoted to art,
architecture and literature, nevertheless they had observed the
methods of the Phoenicians and became their competitors to a
considerable extent in commerce, and having finally conquered
them, inherited their trade. The Greeks were even greater
colonizers than the Phoenicians, and established flourishing
cities in Asia Minor and along the Black Sea,
inAsil" * many of which not only became important mari-
time but manufacturing cities as well. Smyrna,
founded by the Greeks at that time, is still a flourishing em-
porium, noted principally for its rugs. These cities became the
centers for the products of that region, such as cereals, fish,
timber, salt, leather, wood, skins and slaves. Wheat was the
most important product and came chiefly from the south of
Eussia, as it does at the present time, and supplied Athens and
Corinth with breadstuffs.
The Greeks founded several colonies in Italy, chiefly in the
southern portion. They took possession of and cultivated the
18 HISTORY OF COMMERCE.
island of Sicily, where the fertility of the soil proved a great
attraction to settlers, and there built up the rich and powerful
cities of Agrigentum and Syracuse. These cities
hTitaiy"^^ exported from Sicily large quantities of wheat,
fruit, wine and oil, and conducted an extensive
carrying trade with Africa and Egypt. From Italy the
Greek colonies exported wine and cattle and imported articles of
Greek manufacture, such as pottery, metal wares and clothing.
Most of the Greek colonies in Italy, however, gave themselves
up to a life of pleasure, luxury and ease, and thus in time became
an easy prey to the more sturdy Eomans.
Along the north coast of Africa, between Carthage and
Egypt, the Greeks established a number of settlements, the most
important of which was Gyrene. A genial and
inAfrka ^ healthful climate, combined with a fertile soil to
bring prosperity, and Gyrene carried on an active
trade by land with Egypt and the. interior of Africa, from which
it derived horses, grain, oil, dates, amethysts, onyx and precious
stones, and by sea with Greece, Italy and Asia Minor, exchang-
ing these products for cloth and wine. As before stated, Greek
merchants carried on most of the commerce of Egypt, both
domestic and foreign.
15" Longitudt \Q° Wft from 5° Ureenwieh 0
^*' 20° from ilreenwich 25°
CHAPTER II.
ANCIENT COMMERCE— Continued.
THE CARTHAGINIANS; THE ROMAN EMPIRE.
About the year 850 B. C. the Phoenicians had founded the
city of Carthage on the north coast of Africa, planting there a
colony which was destined to have a remarkable career. Tbe
Commerce ^^^^ ^^^ built upou a pcuinsula forty-five miles
of the around, with a neck only three miles across. The
arthagmians j^^^ along the adjacent coast was fertile and well
watered, producing wheat, barley, wine and oil in abundance.
A small bay in the gulf of Tunis afforded an excellent harbor
for the city's commerce. Endowed with Phoenician energy and
skill, Carthage soon gained great wealth and power, conquering
a portion of Sicily and the northwest coast of Africa, thereby
securing complete control of the western half of the Mediter-
ranean Sea.
The Carthaginians founded colonies in the South of Spain,
and the riches of the Spanish peninsula were poured into the lap
of Carthage. Her ships passed the strait of Gibraltar and con-
tinued the voyages formerly made by the Phoenicians to the
north. They also turned southward, sailing along the west
coast of Africa in search of tropical products. They sent cara-
vans into the interior of Africa and Persia and as far east as the
Persian Gulf. Hither were brought gold, ivory, slaves, ostrich
feathers, ebony and dates, and in exchange the Carthaginian trad-
ers exported wheat, meal, wine, ornaments and gaudy clothes, much
the same as worn by many of those peoples at the present day.
After the Persian conquest, many of the merchant princes of
Tyre and other Phoenician cities emigrated to Carthage, and
thus the city grew in wealth and commerce. At one time she
19
20 HISTORY OF COMMERCE.
is said to have possessed territory having a sea line of 1,400
miles and containing 300 cities. In the silver mines of Spain
she employed not less than 40,000 men. The
ofca^thage^^^ Carthaginian merchants did not carry for hire,
but dealt in their own commodities, thus requiring
an extensive system of warehouses and shipping facilities. They
inaugurated a system of marine insurance and made loans on
bottomry. It has been supposed that their leathern money was
in the nature of bank bills.
Thus we see that Greece controlled the commerce of the
eastern half of the Mediterranean Sea, while Carthage dominated
that of the western half. Both of these nations reached their
golden era of prosperity, their commercial zenith, about three
hundred years before Christ; both declined and gave way to a
stronger power about the same time, and to the same power.
While these nations were thus dominating the commerce of the
Mediterranean there was growing a power in Italy that was to
conquer and supplant them both. Like the sturdy tree which
grows slowly that it may knit its fibers closely, Rome required
five hundred years before she was sufficiently strong to wrest
the commercial and political supremacy of the Mediterranean
from Greece and Carthage. She was founded about 750 B. C.
and began her conquest against Carthage and Greece about
250 B. C.
The dividing line between Greece and Carthage seemed to
bisect the island of Sicily. The western half belonged to Car-
thage and the eastern half to Greece. Carthage attempted the
conquest of the eastern half of the island. This
IfCarth^*^ led to a desperate struggle with Syracuse and the
Greek colonies. Then Eome and Carthage began
a contest which lasted with varying results for over a hundred
years. It was in many respects the most determined and relent-
less warfare ever waged, and both parties seemed to realize that
it was a fight to the finish, and must result in the extermination
CARTHAGE. 21
of the one power or the other. The First Punic War lasted from
264 to 241 B. C, when Carthage was defeated and compelled
to give up Sicily, Sardinia and Corsica. After twenty-three
years, war was again declared between these two inveterate
enemies, and in 218 B. C, Hannibal, the great Carthaginian
general, led an army by way of Spain over the Alps into Italy,
and at one time it seemed as if Rome would be completely
crushed beneath his mighty blows. But the tide of war turned
again, and the Carthaginians were defeated and made a de-
pendent province of Rome. Finally, in the Third Punic War,
B. C. 149, the Romans utterly destroyed the city of Carthage,
carrying its inhabitants who survived the siege into captivity,
burning its houses and demolishing its temples. Not content
with even this, they plowed the land where Carthage had stood,
sowed it in salt, thus making it utterly barren, and then
pronounced a curse upon any one who should attempt to rebuild
the city. Could revenge be deeper of more complete? Un-
fortunately, for us, they also destroyed the libraries and records
of this remarkable people, so that all we know of them has come
down to us through their enemies. We are told that Carthage
was a city twenty miles in circumference, and contained not less
than one million inhabitants. The land about the city was laid
out like a vast garden, and embellished with innumerable mag-
nificent villas.
In the same year, Corinth, one of the greatest of the Greek
capitals and seaports, was captured, plundered of vast wealth
and given to the flames by the Romans. Athens and her mag-
nificent harbor of Piraeus fell into the same hands sixty years
later, and thus the seat of commercial greatness moved westward
to the banks of the Tiber.
The Romans were naturally statesmen and warriors rather
than merchants. They were better adapted to govern than to
trade or work. With Roman supremacy, set in an era of growth
and activity in trade and commerce throughout the then civil-
33 HISTORY OF COMMERCE.
ized world, which lasted five hundred years. The effect of
Roman domination was to put an end to all the little wars that
had heen previously waged among adjacent peo-
su"emac P^^^" "^^ becoming Roman provinces they ex-
changed their independence for peace, and peace
with unrestricted commerce fostered trade in all parts of the em-
pire. The Mediterranean nations were brought closer to each
other, both politically and commercially, and became common in-
heritors of such knowledge as was then in the world. Arts, sciences,
improved agriculture and manufactures spread among them. The
city of Rome became the center of the system, and from one
quarter wheat had to be brought, from another clothing, from
another luxuries, and Rome had to pay for it all in coin. She
had nothing to export in return. How could she continue to
pay out coin? The coin was continually flowing into her treas-
ury, as tribute from all of her numerous provinces, and then it
found its way back again to the provinces in payment for mer-
chandise. By this there was a tendency to an equalization of
wealth in all parts of the empire, and a perpetual movement of
money.
Rome, in its golden era of the Emperor Augustus, had a
population of 1,800,000 people, besides its numerous suburbs,
and to supply the needs of this vast population required a large
number of merchants and tradesmen. Besides these, extensive
industries were carried on by skilled labor to sup-
Romr'" °* ply t^e demands of the rich and idle class. Plu-
tarch tells us that there were trade-guilds in wood-
carving, moulding, dyeing, lace-making, cabinet-making, and
among workers in bronze, stucco and gold. There were extensive
establishments for the manufacture of glass and pottery, both in
Rome and other Italian cities. Cloth and clothing were made by
the weavers of Rome in large quantities, the wool coming prin-
cipally from Spain and the cotton from Egypt. The arts of
paper-making and book-binding were carried to a much higher
ROME. 23
degree of perfection than ever before, and in all the great abbeys
and museums there was an apartment — the Scriptorium — for the
copying and making of books.
In order to facilitate their military operations, the Romans
^ built an extensive system of highways, the finest the world had
ever seen. Beginning at the Golden Milestone, which was placed
in the Forum by Augustus to mark the central
Roman Roads point of the Roman Empire, and from which
distances were calculated, these roads extended in
a network in all directions over Italy, and reached as far as
France, Spain and Britain in the west. In Greece, the moun-
tains of Epirus and Macedon were pierced with a great highway,
and in Asia Minor, Palestine and North Africa they built roads
leading to the principal seaports. These Roman roads were
built with a view to permanency, and many of them remain as
important and useful highways of commerce to this day. Won-
derful examples of engineering skill are frequently exhibited
in their construction, being in some instances hewn out of the
mountain side and in others composed of heavy stone viaducts
and bridges which still remain to attest the skill of the builders.
These roads were as useful to Rome as railroads are to us. They
were furnished with milestones and post houses kept in perfect
order. A regular system of posts was established so that the
Emperor might have speedy information of events happening
in the different provinces. The postmen traveled according to
regular time tables, changing horses at each relay, the same as
in this country before the advent of railways. Although built
primarily for military purposes, so that troops could be con-
veyed readily to any part of the Empire, yet these roads and the
post system were highly instrumental in fostering and develop-
ing commerce as well as civilization in general.
We will now take up the consideration of the Eastern prov-
inces of Rome, and by these we mean Greece and the Greek
Islands, Asia Minor, Phoenicia, Palestine, Egypt and the north
24 HISTORY OF COMMERCE.
coast of Africa. These provinces were all placed in immediate
and direct communication, not only with each other, but with
Eome, and the laws were so framed as to protect intercourse and
Roman Com- commcrcc generally, but especially with the seat
Eastern" ^'^"^ of government. Greece had become considerably
Provinces rcduccd in population, especially in her island
colonies, and agriculture declined. The result was that large
areas were now given to grazing and the raising of sheep and
horses. This supplied wool for cloth and horses for the Eoman
army and for the chariots and other vehicles. Athens supplied
Rome with statuary, cloth and perfumery, Corinth with bronze,
and Paros with the finest of marble. Asia Minor and ports of
the Black Sea carried on an extensive trade and manufacture,
supplying Rome with cloths of superior texture, carpets, works
of art in marble, bronze, gold and silver. Through these cities,
too, came a large portion of Roman imports from the far East —
Persia, India and China — slaves, precious stones, silks and per-
fumes. From Syria and Phoenicia came rugs, glass, pottery,
purple dyes, cedar-wood and woodenware. Egypt sent to Rome,
through its commercial metropolis, Alexandria, immense quanti-
ties of wheat, barlej^ cloth and colored glass. It also forwarded
the slaves, ivory and ostrich feathers of Africa; perfumes, in-
cense, gold and horses from Arabia; spices, cinnamon, ginger,
myrrh, precious stones, pearls and silk from India. Large
quantities of grain came from the north coast of Africa, where
the Carthaginians had formerly cultivated the rich soil, and wild
beasts from the desert farther south supplied the Roman arena.
The western provinces of Rome were also very prolific.
Spain was the richest province. Her mines yielded fabulous
Western amouuts of gold and silver, as they had previously
Commerce of douc foT the Phoenicians and Carthaginians, be-
°"^* sides large quantities of iron and copper. Spain
also produced an abundance of wool of a superior quality, besides
wheat, oil, fruit, honey, wine, dyes, pitch, salt and horses. From
ROMAN SLAVERY. 25
France came wine, oil, wheat, millet, honey and cattle. The
rivers of France flowed chiefly in the direction which aided in
transporting products to Rome, and these, supplemented by the
^ excellent highways built by the Eomans, facilitated commerce.
Marseilles was then, as it is now, the principal port of shipment
from southern France. The products of the British isles were
conveyed to Rome partly by ships which rounded Gibraltar and
partly by overland routes through France. These products con-
sisted of tin and iron, cattle, leather, pearls, oysters, slaves, jet,
and far-famed hunting dogs. The mountaineers of northern
Italy and the Alps sent resin, pitch, honey and wax, while Sicily
on the south sent cattle, wool, honey, wine and valuable cloths,
made chiefly at Malta, whose weavers were far-famed for their
skill.
In commenting upon the commerce of Ancient Rome we must
remember that nearly all of the labor of the Empire was per-
formed by slaves. It had been the custom from remote antiquity
for the conqueror in war to carry off those whom he had spared,
and compel them to cultivate his fields and otherwise serve him
as slaves. Many ancient wars were instigated and
Slavery conductcd for the purpose of supplying the de-
mand for labor. Rome was no exception to this
rule. Livy and Plutarch tell us that when Sicily and Greece
were subjugated by Rome portions of them were depopulated.
At the conquest of Epirus by the Roman general, Paulus Aemil-
ius, 150,000 persons were either murdered or carried away into
slavery, and at the destruction of Carthage 50,000 persons were
carried into Roman slavery. At the taking of Thebes large
numbers were thus disposed of, and these not the lower but of
the well-to-do and respectable classes. To these slaves the
laws of Rome were villainously unjust. A slave could be mur-
dered on the slightest provocation, or forced into the arena to
contend with wild beasts for the entertainment of the people.
One statute provided that in case a slave owner was murdered,
26 HISTORY OF COMMERCE.
not only all of the slaves within his house, but even those within
a circle supposed to be measured by the reach of his voice,
should be put to death. Such laws show the small value placed
upon the lives of these unfortunates, and the facility with which
they could be replaced. The great number of slaves necessitated
a vast military system to control them. Now and then they
arose in insurrection, but usually paid the severest penalty as a
result. All kinds of labor were assigned to the slaves and regarded
as contemptible by the Romans. Slaves tilled the soil, rowed
the galleys and performed the work of manufactures. The
carpenters, masons, weavers, and, to a considerable extent, the
copyists of books were slaves. Eich men owned large numbers
of them, the price of a slave being, in the public market, only
equivalent to $25 of our currency. Slave labor was actually
cheaper than animal labor, so that much of the work which we
assign to horses and cattle was performed by men. The result
of this was to debase labor and destroy that class of intelligent,
sturdy and independent workmen and artisans in which the
strength of a nation chiefly rests. Although commerce flour-
ished for a time under the Roman empire, it had beneath it this
system of injustice and inhumanity, and could not be permanent.
It flourished principally because of the vigorous system of gov-
ernment established by the Romans, better roads and means of
intercourse between different countries and provinces, and better
protection against pirates. Thus we see the influence of govern-
ment upon commerce.
J
Jrom 25 Urcenwieh
CHAPTER III.
MEDIEVAL COMMERCE.
DECLINE AND FALL OP ROME; DECAY OP COMMERCE; CONPUSION
AND IGNORANCE; CHARLEMAGNE; VENETIAN COMMERCE.
About the middle of the fourth century the Roman power
began to decline. It had held unbounded sway over an immense
empire for five hundred years, and had created a high degree
of civilization and an extensive commerce among
Commerce °* ^^^ ^^ ^^^ diversified provinces, but riches finally
brought luxury and corruption, internal dissen-
sions weakened the state, and wars, with bad government, de-
stroyed, in a large measure, the commerce of the empire.
Excessive taxation and extortion seriously crippled the pros-
perity of the provinces. Thus Brutus made Asia Minor pay five
years' tribute at once, and shortly after Anthony compelled it
to do the same thing again. To bolster up the failing revenues
of the state and supply needed money for the extravagance and
profligacy of Rome, the coinage was debased by reducing its
weight and increasing the alloy. Thus under Vespasian the
silver coin consisted of one-fourth copper and three-fourths pure
silver. This was later reduced to one-third copper and two-
thirds silver, then to one-half copper, and finally the coin of the
realm contained but about one per cent, of silver, tin being sub-
stituted. From such debasement of the coin it was only a short
step to the repudiation of debts, and this step was often at-
tempted by the demagogues. Law ceased to have any value.
A suitor must deposit a bribe before a trial could be had. The
increase of immorality proceeded. The virtues which had
adorned the earlier history of Rome disappeared, and in the
end were replaced by crimes such as the world had never before
witnessed.
27
28 HISTORY OF COMMERCE.
To the north of the Roman Empire, occupying what is now
France, Austria, Germany and Russia, had grown up powerful,
semi-barbarous tribes of sturdy hunters and warriors. These
"barbarians," as they are called, were of immense stature,
dressed mostly in skins, were well mounted on a superior breed
of horses, and used the customary shields, helmets
Barirarians***^ and othcr implements of war. They had some
semblance of laws, but paid no taxes, and their
civilization and commerce were of the rudest character. These
rugged tribes, known as the Goths, Vandals, Franks, and by
other names, had given the Romans trouble along the border all
through the second and third centuries, and frequent expeditions
had been sent out to quiet or subdue them. They had been
students of Roman discipline and methods of warfare, and some
of them had even enlisted in the Roman army for this purpose,
and thus, as the power and internal strength and prosperity of
Rome began to decline, these hardy peoples, which had not been
enervated by luxury, were in a condition to dispute Roman
supremacy. The Roman Empire had been divided in the year
364 into two parts, with two capitals, viz.: Rome and Constanti-
nople, and this separation divided its strength and made it all
the more liable to defeat.
Now it happened about this time, viz., the fourth cen-
tury, that vast hordes of Huns and other tribes from the north-
ern parts of Asia, now Siberia, swept over into Europe, driving
the Goths and other European tribes before them and stirring
up general confusion. The reason for this migration of the
Huns is supposed to have been a gradual upheaval of the plains
of Siberia, which geologists tell us actually occurred, thereby
causing the rivers to run dry, and forcing the
Rome* ° Huns to movc westward with their herds and
flock§ in search of better pastures. A large num-
ber of the Goths were forced over the Danube and settled within
the boundaries of the Roman Empire. They had their own king,
CONFUSION AND IGNORANCE. 29
and this led to a conflict with Kome, the result of which was that
Alaric, king of the Goths, in 410 penetrated into Italy and
marched, despite all oppositions, to the very gates of the Eternal
City. It had been over six hundred years since Kome had felt
the presence of a foreign enemy at her door, and that was Han-
nibal, the Carthaginian. Alaric laid siege, captured and sacked
the city. His successor made inroads into what is now France
and Spain, and set up a Gothic kingdom there, while other
tribes made similar incursions into Greece, and at the same time,
too, still other Teutonic tribes, the Angles and the Saxons, were
settling in Britain and laying the foundation for an Anglo-Saxon
civilization. Later the Saracens conquered the eastern and
African provinces of Rome and established themselves in Spain,
where they remained for several centuries.
These great waves of migration which passed over Europe
destroyed for a time the old civilization and the old commerce.
All was chaos and disorder, and the night of ignorance and
superstition prevailed. The semi-barbarous immigrants were
content with the simplest necessaries and the products of the
soil. There was no demand for foreign wares or
ig°iwrance ^"'^ costly articlcs of luxury such as the Roman world
had used. The active powers of man were devoted
to war, strife and destruction rather than the arts of peace.
The hordes of barbarians overturned and almost annihilated
every monument of science and art which then existed. The
progress of literature was arrested, and so great was the general
ignorance which prevailed that persons of the most distinguished
rank could neither read nor write. Many charters granted by
kings and others in high authority during this period have been
preserved, to which it appears they were unable to subscribe their
names, and then originated the custom for those who could not
write to make the sign of the cross — a custom held to the present
time, but seldom used in this enlightened day.
.It was impossible in the four or five centuries after the fall
80 HISTORY OF COMMERCE.
of Kome to carry on agriculture or other industries with any
degree of success. The bare necessities were the sole aim of
a great majority of the people. Internal trade was hardly
more successful than agriculture, and for the same reason. For
several centuries there is no trace of any important manufact-
ures except of course those domestic arts of weav-
comm^rce ^^^ ^^^ Spinning, which are absolutely necessary
for providing clothes, and which can be practiced
by separate individuals in every village or household. Rich
men, indeed, used to keep artisans in their households as
servants; but this only shows that there were no recognized
seats of manufacture from which they could easily procure
what they wanted. Even kings in the ninth century had their
clothes made by the women upon their farms. No doubt the
villages had their smiths and weavers, but these occupations
belonged to a few isolated individuals, and had not yet developed
to any considerable branch of industry. Trade between various
localities was very limited, for the general insecurity of the
times made mercantile traffic highly dangerous. The want of
means of communication and transportation prevented men from
easily moving about to supply one another's wants, and at the
same time made it difficult for them to ascertain what others'
wants were. Eobbery and violence were frequent, and robbery
by extortionate tolls still more so. The ordinary knight of
those times was nothing more nor less than a bandit, perhaps
not always as openly criminal as a highwayman, but very often
employing the same methods. Since but few could read or
write, the gates to the temple of knowledge were shut to the
great body of the people, and they did not even surmise that
they had any right to explore its treasures. Few books were
written, and there are few inventions, useful or ornamental to
society, of which this long period of nearly five centuries can
boast.
About the year 800, Karl the Great, otherwise known in
CHARLEMAGNE. 81
history as Charlemagne, was made king of the Franks, and under
his wise and vigorous rule learning, industry and commerce
revived; towns and cities sprang up and manu-
a*!d'*^76^-^?4 factures increased, thus laying the foundation for
the revival of internal and foreign commerce which
was destined to set in about two centuries later. Charlemagne
gave every freeman a share in the making of the laws, and
improved the administration of justice. He fostered education
by establishing schools and having the works of the ancient
Roman writers transcribed. Unfortunately his successors were
weak and inefficient, and his death was followed by a period
of great confusion, during which Europe was severely harassed
on the south by the Arabs, on the east by the Slavs and on the
north by the Normans.
Passing over a period of perhaps two centuries after the
reign of Charlemagne, in which there were some occasional
indications of the dawn of a brighter era, the inhabitants of
Revival of Europc finally began, about the eleventh century,
Learning and to experience a change auspicious of better times,
ommerce rpj^^ ^^^ ^^ making paper in the manner now be-
come universal was invented, and greatly increased the number
of manuscripts and the general diffusion of learning. This, fol-
lowed by the discovery of the art of printing, brought the price
of books within the reach of those of moderate means. Then
came the discovery of the mariner's compass, making it possible
to extend navigation which had hitherto been confined to the
coast and the Mediterranean Sea, over the ocean, leading to new
and rich discoveries, and preparing the way for the commerce of
the future. The Feudal system* had been established after the
♦The Feudal system was a combination of Roman and German laws and
customs involving the tenure or ownership of land and military service to
the lords or the king. After the conquest of the Roman provinces in Prance
and Germany the land was generally divided by the conquerors into three
portions: the king took one; another he divided among his generals and
soldiers under the condition of military service; the third was left to the
32 HISTORY OF COMMERCE.
reign of Charlemagne, and this favored the growth of towns and
consequently an increase in industry and commerce by the sta-
bility which it gave to property and society in general. Trade
guilds and craft guilds were organized, suggesting the idea of
mutual help and co-operation. Trade guilds embodied the idea
of our modern chambers of commerce, and exerted considerable
influence upon the government of the town. Craft guilds aimed
to secure good handiwork on the part of members, to regulate
the number of apprentices and to provide a common fund in case
of sickness, very much after the plan of labor unions in our day.
While the introduction of the Feudal system was an aid to com-
merce by settling society into a more stable and organized form,
it finally became a hinderance on account of the restrictions which
it imposed upon both property and persons. The service exacted
Eifectof °^ vassals often interfered with their employment
Feudalism on by Calling them away from agriculture or other
ommerce occupatious at tinics whcu they were needed. The
lords levied heavy assessments and fines upon those who were
dependent upon them for every attempted change of occupation,
so that those who desired to give up agriculture and become
artisans or traders were hampered in their efforts. Jealousies
and rivalries between the lords of different territories caused
taxes to be laid upon the commerce between one domain and
original inhabitants upon the payment of a tax. But for the purpose of
binding certain of his subjects more closely to the throne, the king granted
out a part of his own land to them for life. This was called a fief; the
giver was the liege lord, and the receiver was called a vassal*. In the same
way, those who had acquired large life estates as fiefs, sub-let to those less
fortunate, portions of their estates and thus had vassals of their own.
Bishops gave fiefs to knights for services in defending convents, and thus
society was bound together by a system of service and obligations for
mutual protection and defense. Gradually the more powerful oppressed
those under them until the class which cultivated the soil became hereditary
serfs attached to the land, and in reality slaves. The Feudal system, while
affording the benefits of protection to property, was a great hinderance to
freedom of both person and property, since under it land could not be
conveyed, nor serfs transferred readily.
^ ^ or
VENfGBi^£iii>^ 33
another, and thus the system eventually proved to be restrictive
and injurious to the development of trade and commerce.
About the twelfth century a number of Italian cities came
into prominence on account of the trade and manufactures which
they had built up. Among these Venice, situated on a group
of sandy and barren islands in the Adriatic Sea, whither its in-
habitants had been driven by the armies of Attila, was the most
important. The wealth of Venice was originally due
venicr'^" ° to two articles of commerce, viz., salt and fish, these
being the only products obtainable on account of
the location of the city. The Venetians built up a large trade
with mainland cities, and eventually embarked in the carrying
trade. Their ships went up and down the coast, as far east as
Greece and west to Spain. Salt and fish were exchanged with
other cities for oil, wine, lumber and metals. Extending her
commerce, Venice brought the products of Egypt and the East
to her wharves, and the city soon became the emporium of
southern Europe. Her ships now touched every shore and part
of the then civilized world, and her commerce included every
article of value. To protect her ships from robbers and pirates
she built an extensive navy, and each fleet of ships was convoyed
by a man of war. Her merchant squadrons numbered in all over
3,000 ships, and made regular sailings. Besides her maritime
commerce, Venice built up a large overland trade with Germany
and central European points.
By her extensive trade and navigation Venice raised herself
to a degree of prosperity and magnificence which recalls the
memory of the most flourishing period of ancient Greece. She
established a republican form of government,
Tf ve^cT'*' built gorgeous palaces (that of the Doge or Gov-
ernor), magnificent churches (the Cathedral of
St. Mark), and splendid squares (that of St. Mark), and made
the city the wonder of the world. The Venetians supplied salt
and fish to nearly the whole world, a trade in which they had
34 HISTORY OF COMMERCE.
a complete monopoly; and in every instance where a treaty was
made with a foreign power a clause was introduced reserving
to Venice the exclusive privilege of supplying these commodi-
ties. Besides its enormous trade, Venice engaged extensively in
manufacturing, and exported its wares to all parts of Europe and
Asia. Silk was one of the most valuable products of its artisans,
the art of weaving this into beautiful tissues having been learned
from the Persians. Another product was glass, which they made
from the sand of their own islands in such a high degree of
skill that Venetian glass became celebrated everywhere for its
clearness and beauty. This art the Venetians had learned from
the Arabs, and, with the decorative art and skill which they
possessed, were able to produce glass work of rare beauty. They
also made woolen and cotton cloths from the raw products which
they imported from Spain, Greece and Egypt, and carried on
extensive manufactures in brass and iron, so that their shields
and armors were the most beautiful and excellent in Europe.
The Venetians kept constantly developing their shipping facili-
ties. They made extensive improvements in the methods of
marine and naval construction, established arsenals and eventu-
ally acquired naval supremacy.
But this energetic and progressive people seemed possessed of
a natural faculty for finance and commerce. They were natural
born traders and financiers. A great feature of the wealth of
the city was its banking facilities. The bank of Venice, estab-
lished in 1171, was the first regularly organized bank in the
world, although it did not develop all of the func-
venice^" ° ^^^^^ ^^ ^ modcm bank until long after. The
republic, being hard pressed for money, on three
different occasions was obliged to levy forced contributions upon
the citizens, and in return gave them perpetual annuities at
certain rates per annum on the amount loaned. The offices for
the payment of these annuities were consolidated and became
the Bank of Venice. The annuities or interest on the govern-
VENICE. . 85
ment loans being punctually paid, the amount of the loan as
registered upon the books of the bank came to be considered as
a species of property and passed from one person to another by
devise, descent and assignment. Debts were frequently paid
in this manner, and by allowing the mutual cancellation of
debts by the transfer of credits on the books of the bank, the use
of money was at first saved to a considerable extent, and later
certificates, payable to bearer, the equivalent of bank bills, v/ere
used to obviate the necessity for entries upon the books.
The "Rialto" was their great commercial exchange where
the merchants met and did their trading. The transactions
of this exchange had a wider influence on the commerce of the
world at that time than any other market. The Venetians were
the first to reduce finance to a science. They were the origin-
ators of the system of double entry book-keeping,
Jnd Learning" wMch we usc with modifications to this day. They
are credited by some authorities with having a
knowledge of printing prior to Coster and Gutenberg (A. D. 1440),
having (as has been asserted) received it from the Chinese, by
whom the art had been practiced for two thousand years. We know
that Venice took the lead of all Europe in the manufacture of
books and that newspapers were first issued by them, thus indi-
cating that Italy stood in the van of progress and enlightenment
at the close of the fifteenth century.
CHAPTER IV.
MEDIEVAL COMMERCE— Continued.
DECLINE OF VENICE; COMMERCE OF GENOA, FLORENCE AND
PISA-EFFECT OF DISCOVERY OF AMERICA.
Besides Venice there were several Italian cities which
achieved great renown in commerce, art and learning during
the middle ages. These were Genoa, Florence, Pisa and Milan.
They followed Venetian methods to a consider-
ofvenke^^ able degree and seemed possessed in a measure of
the Venetian character for commerce and finance.
Rivalries sprang up and wars between Venice and these cities
were frequent and bitter. Genoa was an inveterate enemy of
Venice and their conflicts at times remind one of the Punic Wars
waged between Rome and Carthage. Venice may be said to have
reached the period of its greatest wealth and power about the
fourteenth century. Then, by gradual steps, the original, demo-
cratic constitution of the Republic was changed into an oppres-
sive, hereditary aristocracy and the power of the state vested in a
few noble families. Venice was governed with dictatorial power;
a state Inquisition with subterranean dungeons and racks was
established, and every act of the people was watched, every word
listened to. Along with this, luxury and wealth had brought
corruption in office, and the moral tone of the people declined,
thus sowing the seeds of national weakness and decay. Two
other circumstances contributed directly and powerfully to the
decline of Venice. The first of these was the continued successes
of the Turks in the East, by which Venice was robbed of the
commercial advantages which she had so long and profitably
enjoyed, together with the loss of the island of Crete, one of her
richest colonies; and the other was the discovery of the sea route
GENOA. 37
to India by way of the Cape of Good Hope. These diverted a
considerable portion of the commerce of Western Europe from its
former channels through the Mediterranean, and thus reduced
the commerce of Venice accordingly.
Genoa was the proud rival of Venice. Founded by the
Romans before the Christian era, Genoa flourished as a com-
mercial emporium from the beginning. It had a spacious har-
bor, from which it sent timber, wool and earthenware to other
parts of Italy in exchange for wine and oil. After the fall of
the Roman Empire, Genoa set up a republican form of govern-
ment and in the tenth century built a navy with
GenoT'"°^ which it began to reach out for a share of the
Mediterranean commerce. It established a pros-
perous trade with Sicily, the north coast of Africa, and the
southern coast of France. The islands of Corsica and Capraja
became Genoese colonies, and an overland trade was established
with Flanders and Germany. Like the other Italian cities
Genoa profited by the Crusades, for in return for the help ren-
dered by it to the crusaders the republic was granted a strip of
Phoenician territory and various privileges of trade in Syria,
which gave it a valuable portion of eastern trade, and enabled
the republic to eventually get a firm foothold in Greece and Asia
Minor. "With a flourishing commerce, the harbor of Genoa was
constantly filled with a forest of masts; her commercial ex-
changes were only second to the Rialto of Venice in size and
importance and her marble palaces gave evidence of her increas-
ing wealth. The growth of Genoese commerce and influence
aroused the jealousies of the other republics of northern Italy,
especially Venice and Pisa, and they sought by every means in
their power to limit her ambition. From the eleventh to the
end of the fourteenth century Genoa was almost constantly at
war with. Venice, thus wasting the possibilities of both republics
in domestic broils and interminable rivalries. They first came
into serious conflict when the merchants of Genoa attempted
38 HISTORY OF COMMERCE.
to obtain a share of the trade of the Grecian Archipelago and
Black Sea Ports. Finally in the latter part of the thirteenth
century the Genoese triumphed over the Venetian fleet, and in
the treaty of peace which followed Venice surrendered to Genoa
her commerce in the Black Sea, and her colonies and agencies
which had been planted there.
Genoa possessed but few industries of her own, her commerce
consisting chiefly of the exchange of the productions of the
East with those of the West, taking chiefly cloths and pottery
from France and linen and leather from Germany
imTus^toies *^ *^^ ^^st, and bringing from the Black Sea and
other eastern ports fine cloths, spices, silks and
ivory. However, near the close of the twelfth century, the
Genoese had plundered two Moorish cities in Spain, from which
they derived the art of silk manufacture, and so successful did
the industry prove, that silk became a staple manufacture
among all the Lombard republics, and the cultivation of mul-
berry trees was enforced by their laws. Woolen goods were also
manufactured by the Genoese to a considerable extent.
Usury, or lending money on interest, was regarded as a crime
by the theologians of the middle ages. This strange prejudice
against one of the most useful and legitimate branches of busi-
Genoese ^^^^ Continued for hundreds of years, and although
Finance and finally eradicated, had its effect upon legislation
*^^ in modern times. The trade in money, and indeed
a large part of the inland trade in general of the Italian cities,
had fallen into the hands of the Jews, who were noted for
their usury. They were not molested by the clergy, being re-
garded as infidels, and they had no conscientious scruples them-
selves against usury, since the Jewish law permitted them to
charge usury against Gentiles.* The rates of interest were ten
to fifteen per cent, per annum. At Verona in 1228 the rate
♦Unto a stranger thou mayest lend upon usury. But unto thy brother
thou Shalt not lend upon usury. Deut. XXIII.
DECLINE OF GENOA. 89
was fixed by law at twelve and one-half per cent; at Modena
in 1270 it seems to have been as high as twenty per cent., and
in France and England still more oppressive. The republic of
Genoa, towards the end of the fourteenth century when it had
grown wealthy, paid from seven to ten per cent, on its outstanding
obligations. The high rate of interest generally during this
period was owing partly to risks, business being hazardous on
account of inefficient laws, and also to the fact that profits in
business were very large. The Venetian merchants are said to
have cleared never less than forty per cent, profit on their com-
mercial transactions, and since Genoa and the other Italian cities
exercised monopolies we may safely assume that their profits were
enormous. In the last part of the thirteenth century the bank-
ers in the Italian cities and those of the south of France took up
the business of remitting money by means of bills of exchange,
and charging interest on loans. A distinction was then made
between moderate and exorbitant interest, and the utility of
negotiable bills of exchange was so great that gradually the
prejudice against usury (interest) wore away, and the Lombard
usurers established themselves in every country.
Having finally been robbed of its Black Sea commerce by the '
Turks, and later defeated by the superior power of its old enemy
the Venetians in other parts of the Mediterranean, the Genoese
turned their attention in another direction, hoping
Ameri(»^° thereby to retrieve their fortunes. There were
among Genoese sailors some who were acquainted
with the globular form of the earth, having acquired this knowl-
edge from the Mohammedan astronomers, and these men orig-
inated the attempt to reach India by sailing to the west. Great-
est and best among them, seeking the welfare of his city and
hoping that the riches of India might thus be secured, was
Christopher Columbus, the son of a wool comber. He had
studied the ordinary branches of arithmetic, drawing and paint-
ing, and is said to have acquired a singularly beautiful hand-
40 HISTORY OF COMMERCE. '
writing. After attending the university for a short time, he
went to sea when fourteen years of age, and for many years was
engaged in the Syrian trade and in that of other ports, later turn-
ing his attention to the construction of charts for sale, and the
deeper study of geography and navigation.
The result of Columbus' discovery was to draw the attention
of Europe to the westward and dispel the mystery of the open
sea. Migration set in towards the western coast of Europe, and
Decline of ^^^ ^^^ routc to India diverted commerce in other
Genoese chauncls. Gcuoa became subject to Milan, and
Commerce although it again grew prosperous, it never re-
gained its former commercial importance.
Only second in importance to the republics of Venice and
Genoa was the city of Pisa, situated in a plain between the Appe-
nines on the east and the Tuscan Sea on the west. The founding
of the city, like that of Genoa, dates back to the Eoman Empire,
and like all other Italian cities, Pisa suffered from the barbarian
conquest; but like them, too, she secured her independence, set
up a republican form of government, and rapidly sprang forward
to a foremost place among the maritime states of Italy. In the
eleventh century Pisa acquired the islands of Sardinia, Corsica
and Elba, besides adding many important districts along the
coast to its territory, with all of which it carried on a prosperous
commerce. The crusades poured fresh wealth into the lap of
Pisa, and in return for its help in transporting the armament to
Palestine, Pisa was given extensive privileges and became one
of the channels through which the produce of the east flowed
in upon the ruder nations of western Europe. Pisa reached the
zenith of its power at about the end of the eleventh century. Its
prosperity was marked by public edifices which stand as monu-
ments to Pisan greatness to this day. Pisa was the first Italian
city which took pride in architecture, and its leaning tower and
cathedral are examples of skill and beauty. It was in this
cathedral that the illustrious philosopher, Galileo, watched the
FLORENCE. 41
swinging of the chandelier, and observing that its vibrations,
large and small, were made in equal times, "left the house of
God, his prayers unsaid, but the pendulum clock invented."
The Pisans are also credited with being the first
^nTi^e^niag *^ codifj and promulgate a system of maritime
law suited to the extensive Mediterranean com-
merce, defining the rights of neutral and belligerent vessels,
and thus laying the foundation for a portion, at least, of the in-
ternational law of modern times. In the course of time Pisa
succumbed to the wars and competition of rival cities. Genoa
was its most bitter enemy, and in one fatal battle off the Island of
Meloria, in 1284, the entire Pisan navy was destroyed. Torn by
dissensions, and stripped of her commerce and colonies, Pisa
was finally sold in 1406 to Florence for 400,000 florins, and be-
came a port for the commerce of that city.
Situated above Pisa, on the River Arno, and being without
shipping facilities, the success and commercial importance of
Florence were achieved in the direction of manufacturing,
finance, literature and art, rather than maritime
Florence trade. Her weavers and goldsmiths were famed all
over Europe for their fine products, and her silk
and woolen cloths and articles of jewelry were exported to all
the principal cities of the western world. Like the other Italian
cities, Florence was vexed and retarded by internal revolutions
and external strifes. In the latter part of the thirteenth century
a republican form of government was established, which con-
tinued in modified forms for several hundred years. Notwith-
standing the wars and strifes in which Florence engaged in
common with her sister republics, her growth in wealth and
population continued without abatement, until at one time she
was not only the capital of Tuscany, but the chief city of all
Italy.
In the fifteenth century the great family of Medici, Floren-
tine bankers, succeeded in obtaining control of the government
42 HISTORY OF COMMERCE.
of Florence and changing it from a republic to an hereditary
aristocracy, but while this was a blow to popular government,
yet the remarkable character of the Medicis and their vigorous
and enlightened rule were by no means discouraging to the com-
mercial and artistic progress of the city. Indeed it was under the
Florence under Mcdicis that Florence achieved its greatest glory,
the House of TMs Celebrated family of bankers was founded
'^**^*" by Giovanni de Medici, a merchant and after-
wards a banker, about the middle of the fifteenth century, but
the greatest of the family were Cosmos and Lorenzo, sons of
Giovanni. The latter, surnamed the "Magnificent," so gov-
erned Florence that all Europe was filled with his fame. Eichest
of Italians that he was, he lavished his wealth on palaces,
churches, hospitals and libraries. He made Florence the seat
of every art and science and a seminary for all Europe. His
court was ornamented with artists, poets and writers. Learned
men from Greece and other portions of the East, who were
flying from the sword of the Turks, taught the Greek language
and literature in Florence; and under his rule, sculpture, paint-
ing and music began to unfold their choicest blossoms. Florence
was called "The Athens of the West," and to this period of its
history we are indebted for the names of Michael Angelo the
sculptor, Dante the poet, Machiavelli the statesman, and Amerigo
Vespucci, the discoverer of our western hemisphere.
The banking houses of Florence were the largest and wealth-
iest of Europe, and through them nearly every great loan made
by the kings of central and western Europe to carry on their
wars was negotiated. The houses of Bardi, Pitti,
Bankerr*^ Mcdici and Peruzzi were the leaders in the finan-
cial world during the thirteenth and fourteenth
centuries, and are said to have been "The pillars which sustained
a great part of the commerce of Christendom." The customs of
England were farmed to the Bardi in 1329 as a security for
loans, and they probably had excellent bargains. In 1345 the
MILAN. 48
Bardi and the Peruzzi failed. Edward III of England owed the
Bardi 900,000 gold florins and the Peruzzi 600,000 florins, which
he was unable to pay on account of his wars with France. The
king of Sicily also owed each of these houses 100,000 florins
which he was unable to pay. On the other hand the Bardi had
deposits belonging to citizens and merchants to the amount of
550,000 florins, and the Peruzzi were carrying deposits to the
amount of 350,000 florins in gold. Unable to collect from the
kings the bankers were equally unable to pay their depositors.
The failure of these two banks caused great distress to the city
and injury to its commercial interests.
Milan, the ancient capital of Cisalpine Gaul, and the favorite
residence of the Gothic kings, is the fifth of the Italian cities
which achieved commercial distinction in the middle ages.
Without a seaport, she acquired her greatness by
Miten***^*^° agriculture and manufacture rather than through
maritime commerce. Situated in a beautiful plain
of fertile land through which coursed a tributary of the River Po,
the Milanese early turned their attention to agriculture and the
industrial arts. The invasion of the Huns in 899 caused the
Milanese to wall in and fortify the city, and thus later it became
independent of the feudal barons of northern Italy, and set up
its own republican form of government. After the peace of
Constance in 1184, Milan grew apace both in population and
material wealth. Manufactures flourished extensively, the lead-
ing industry being the making of armor.
During her struggles with the Emperor Frederick of Ger-
many (Frederick Red-Beard) for the preservation of Milanese
independence, a powerful fraternity called the Umiliati was
formed, which later became instrumental in developing the wool
trade and subsequently gave the first impetus to the production
of silk. From this period also date the irrigation works which
render the plain about Milan a productive garden to this day.
In the thirteenth century Milan was greatly retarded in her de-
MILAN. " 45
velopment by the turmoils of the Guelphs and the Ghibelines,
the partisans of first one and then the other obtaining control
of the government. In the fourteenth century the
con*tro/'° great family of Giovanni Galeazzo, one of the
Visconti, became sole lord of Milan, and inaug-
urated a remarkable career, resembling in many respects those
of the Medicis in Florence. It was under him that the Cathedral
of Milan was begun in 1386. It is built of marble from the
quarries which Visconti gave for the purpose. The work upon
this wonderful building was continued through several cen-
turies, and finally finished under Napoleon in 1805. After many
vicissitudes and strifes, Milan, in 1500, passed under control
alternately of France and Spain, and finally became a part of the
Kingdom of Italy. Owing to its agricultural and manufacturing
interests, it suffered less than the maritime cities of Italy by the
discovery of the Cape route to India.
Gradually the seat of commercial empire shifted from the
Italian cities to othej parts of Europe, north and west. The^
inventions and discoveries incident to the general intellectual
Change of awakening which set in about the fifteenth cen-
commerciai tury, the invention of the art of printing, the
Centers mariner's compass, the use of gunpowder, im-
provements in shipbuilding and in methods of finance, com-
merce, and law, worked changes in the established channels of
trade and developed new centers of commerce. We are now to
leave the Mediterranean Sea, upon, whose shores was grouped
the ancient and medieval commerce and civilization of the
world, and betake ourselves to other parts of Europe.
CHAPTER V.
MODERN COMMERCE.
THE CAPE ROUTE TO INDIA; PORTUGUESE COMMERCE; SPAIN'S
VAST POSSESSIONS; EXPULSION OF THE MOORS;
DUTCH COMMERCE.
Allusion has been made to the discovery of America and of
the Cape Route to India, two events which occurred at the
dawn of the modern era of history, and were destined to exer-
cise a momentous influence upon the commerce of the world as
well as the progress and w^elfare of the human race. Near the
close of the fifteenth century the map of the world consisted
of central and southern Europe, the north coast of
New°Era* Africa, and Asia as far as Persia. India and the
far East was a land of mystery, while the West
was a waste of waters enveloped in glooni and superstition.
With the aid of the mariner's compass bold navigators had
gradually ventured farther from land, and in 1431 a ship captain
from Bruges had sighted the Azore Islands. The Atlantic was
bein^ gradually explored.
The Portuguese were at this time an enterprising and grow-
ing commercial and maritime people and their capital, Lisbon,
owing to its frontier position, had become an important distribut-
ing point for products on the western coast of Europe. In 1496
a Portuguese navigator, Vasco de Gama, steering his course
southward along the shores of Africa, finally doubled the Cape
of Good Hope and reached India, to return with
Routeto^india fabulous accouuts of its Wealth and mysteries.
The importance of this discovery was enhanced by
the fact that at this time the Turks, Moors and Algerians were
swarming around the shores of the Mediterranean Sea, capturing
46
THE PORTUGUESE. 47
ships and caravans and destroying commerce, so that the old
routes to India overland by caravans were no longer safe.
Venice, owing to the decline of her commerce, was no longer able
to successfully resist these inroads and attacks, and hence the new
route afforded an effectual escape from this serious difficulty.
Besides, an all sea route avoided the labor and damage to goods
incident to handling them in changing from ship to camels or
the reverse, and furthermore, by this sea route the traders were
enabled to go to India and see the country for themselves, exam-
ine its products and judge of its resources and wants, instead of
trading, as hitherto, chiefly through Arabian merchants. Thus
we see the importance of the discovery of the new route, and its
effect in diverting European commerce from Mediterranean ports,
to which it only returned after the completion of the Suez Canal
in our own time.
The Portuguese established colonies on the coast of Malabar
and the island of Ceylon. After some conflicts with the natives
on account of outrages inflicted upon them, aided by the Moham-
„ _^ medan merchants and even bv the Venetians who
Portuguese
Trade in the sought to cxpcl their rival from this rich field of
^*^* commerce, the Portuguese succeeded in firmly es-
tablishing an extensive trade with India. By 1515 they had
captured a number of cities along the coast, subjugated the
spice bearing islands, and really controlled the commerce of the
coast of Asia extending from the Persian Gulf to the islands of
Japan. Lisbon became the seat of this extensive commerce and
the distributing point for the products of India.
Early in the spring of each year a fleet of Portuguese ships set
sail for India, convoyed by war ships. The route lay along the
west coast of Africa; and after doubling the Cape, the trade
winds assisted them in an easy and direct voyage across the
Indian Ocean to the city of Goa, on the west coast, their prin-
cipal port. Eeturning, the route was much the same, except
that the fleet touched at various trading stations along the coast
48 HISTORY OF COMMERCE.
of Africa, thence at St. Helena, the Cape Verde and Azore
islands, and home. The voyage usually required about eighteen
months for its completion, and owing to inferior ships and the
imperfect knowledge of navigation which prevailed at that time,
frequently resulted in the loss of a portion of the fleet. But the
profits of this commerce were very large and the field of adven-
ture enticing.
From India the Portuguese ships brought to Europe in
greater abundance those products frequently mentioned hereto-
fore as having been imported by the caravans of Arabia and
Persia. From the west coast of Africa and the islands they
brought ivory, gold, gum, wine, cotton, and slaves. To Lisbon
came the ships of Britain, Flanders, and the Hansa towns of the
North and Baltic Sea ports, to receive their cargoes for home
consumption, and for a time Lisbon promised to eclipse the
wealth and commercial greatness of even Venice or Genoa.
Having succeeded so well in the East, the Portuguese turned
Portuguese ^^^^^ ^^^^^ westward and discovered Brazil with its
Success and vast and Varied wealth. But the avarice and greed
of the Portuguese, their monopolistic spirit, their
oppression of other merchants who were their best customers,
and their generally narrow and short-sighted policy, together
with their neglect to provide for the defense of their colonies
and trade possessions, soon brought about their downfall. By
1580 the Portuguese commerce in the East had seriously de-
clined, and in that year the crown was united with that of Spain
under Phillip 11. This union of the two countries continued
until 1640, when they again separated, but since that date
Portugal has been too weak and impoverished to achieve any
distinction in commerce.
The Spaniards of the sixteenth century were great explorers
and discoverers, but their conquests were usually inspired by an
inordinate thirst for gold and not for commercial advantages.
They were singularly lacking in the commercial faculty, and
SPAIN. 49
despised the industries. They not only neglected and failed to
build up the waning Portuguese commerce in the East, but soon
became involved in a war with the Dutch, which
Commerce ^^^ ^^^ mcaus not Only of destroying a consider-
able portion of their own and the Portuguese
fleet, but also of driving the Dutch into the commerce of India
which the Portuguese had once so jealously kept to themselves.
By means of discoveries in the new world, under the patron-
age of Ferdinand and Isabella, by Columbus, Cabot and son and
Ponce de Leon, and the inhuman conquests of Mexico by Cortez,
of Peru by Pizarro, and of Chili by Almagro, all of which are
embraced within a period of fifty years in the last part of the
Extent of fifteenth and early part of the sixteenth centuries,
Spanish nearly the whole of the Western Hemisphere came
ommions under the control of Spain, and so remained for
almost a hundred years. Besides crushing out in Mexico and
Peru a civilization which might have instructed Spain, and
practicing the most atrocious barbarities upon millions of inno-
cent human beings for greed of gold, and in the name of religion,
Spain did almost nothing towards developing the resources of
this new world.
Not only did Spain possess a monopoly of the Western Hemi-
sphere at the beginning of the sixteenth century, but also con-
trolled a large portion of Europe, including what is now the
empire of Germany, the Netherlands, Burgundy, Sicily, and
Milan, Tunis and Oran, together with the Canary and Cape
Verde Islands in Africa, and the Philippines and other posses-
sions in Asia. Immense in extent and of incalculable richness
as were her dominions, yet the most fertile and promising
regions were despised unless they immediately gave promise of
gold or silver in large quantities to satisfy Spanish greed and
luxury.
Spain pursued the most selfish, narrow and short-sighted
policy towards her colonies, seeming to regard them as proper
50 HISTORY OB^ COMMERCE.
subjects to be bled and fleeced for the enrichment of the home
country. She farmed the revenues to local governors, who, hav-
s anish ^^S P^^^ ^^® required sum to the crown, in turn
Colonial enactcd an enormous increase by oppressive taxes
^°^^^y on the people levied in every conceivable form.
Few harbors were established, manufacturing was not only dis-
couraged but actually forbidden, as was also the raising of all
European products. Natives and Colonists were forced by every
device to purchase from the mother country all manufactured
articles, and her colonies were regarded as markets for the
goods of the mother country. The inhuman treatment of the
natives was in accord with the general spirit of Spanish colonial
policy. In 1532 the silver mines of Zacatecas, Mexico, were
opened, and about the same time, extensive mines in Peru. The
native Indians were employed to work these mines, and were so
cruelly treated that nearly all of them died, so that slaves from
Africa had to be exported to fill their places. With appalling
atrocity the Spaniards proceeded to confiscate the lands and
goods of the natives and infiict upon them every form of cruelty
and oppression.
The same year in which Columbus discovered America wit-
nessed one of the most melancholy events in Spanish history,
and one which seriously affected the prosperity of the country —
the expulsion of the Moors. When the Moorish kingdom of
Grenada, after a war of ten years, fell before the soldiers of
Ferdinand and Isabella, the Mohammedans were allowed no
alternative but to leave their country or embrace Christianity.
Many chose the former course, while others, with inward repug-
nance, yielded obedience, but were driven by the cruelty of the
inquisition to repeated rebellion, by which their
ttiTMoors°* condition was always rendered worse than before.
They were finally commanded to renounce even
their language, dress and customs, and 800,000 Moors, men and
women, old men and children, left the land of their birth, their
SPAIN. 51
blooming fields and the houses they had built, and where their
ancestors had lived for eight hundred years. The flourishing
plains of the south of Spain soon became a desert, agriculture
decayed and trade stagnated; prosperous villages were reduced to
ruins, towns once animated by commerce became depopulated,
poverty, dirt and sloth took possession of the once rich and
happy country, the departed splendor of which is still attested by
such magnificent ruins as the Alhambra.
A fate similar to that of the Moors was visited upon the
Jews*, while priests and courtiers divided the treasures of the
banished. The Jews were the most diligent and skillful work-
men in Spain, and their banishment, together with that of the
Moors, left the country impoverished in every branch of trade
and industry. The Spaniards were unable to supply the articles
which the silver of Peru would purchase, and
uidi^rtriir'' hence the Spanish gold and silver which flowed in
from their conquests and discoveries went to the
markets of the Netherlands and England, there to be exchanged
for linen and woolen cloth, manufactured metals, English woolen
fabrics, and timber for ship-building. English, Dutch and Ger-
man merchants brought the articles which Spain needed, and
carried home in return gold, silver, pearls and wine.
Now observe how this fortunate condition of affairs, this
profitable trade with England and other northern countries,
was interfered with and broken up by Spain herself. During the
sixteenth century religious zeal and fanaticism were very active
in Spain, and the Inquisition spread terror to all heretics.
Philip II conceived an ambition to invade England, dethrone
Elizabeth, and restore the Catholic religion which had been
abolished by Elizabeth's father and predecessor, Henry VIII.
For this purpose, in 1588, he fitted out the greatest fleet of the
century, and gave it the boastful name of the "Invincible Ar-
*In the spring of 1492 the Jews, to the number of one hundred and
sixty thousand, according to Prescott, were expelled from the kingdom.
53 HISTORY OP COMMERCE.
mada.'^ With this he attacked the English squadroji off the
south coast of England, resulting in the loss by destruction and
capture of the entire Spanish fleet. This conflict destroyed the
At War with commercc between Spain and England, and the
the English lattci bcgau to make preparations at once to
and Dutch embark in American commerce and colonization
on her own account, with the result that the first permanent
English colony was planted in Virginia nineteen years later.
From that date Spanish interests in the western world began
to decline. Her colonies revolted early in the nineteenth cen-
tury and several of them acquired their independence.* Cuba
in 1868 attempted to throw off the yoke of Spanish oppression,
but failed. In 1895 another attempt was made, resulting in a
bloody war of nearly five years, during which the American
warship, Maine, was blown up in Havana harbor. This overt
act gave the United States the desired opportunity to assist the
Cubans, and led to the Spanish- American war which freed Cuba
in 1899, and resulted in Porto Eico and the Philippine Islands
being ceded to the United States. Now only the Canary Islands
and two small provinces of doubtful value on the west coast of
Africa remain as the residue of Spain's vast possessions.
Equally unnecessary and unwise was the breach between
Spain and the Dutch. The Netherlands were Spanish territory,
and the Dutch were Spain's best customers. Their ships were
in the habit of going to Lisbon for their cargoes of eastern
goods, but the fanatical Philip II undertook to force the Roman
Catholic religion upon them, and at his persecutions they re-
volted. He then closed the port of Lisbon against their ships,
and their alternative was to either give up their eastern trade or
go to India for the goods themselves. They were too enterpris-
ing to do the former, and hence was begun the commerce of
♦Mexico became independent in 1822; Peru, 1824; Chili, 1826; Colombia,
1820; Ecuador, 1830; Bolivia, 1825; Venezuela, 1831; Uruguay, 1825; Argen-
tine Republic, 1810; Paraguay, 1814; Cuba, 1899; Puerto Rico and the
Philippines were ceded to the United States in 1899.
THE DUTCH. 53
the Dutch in India, while at the same time they joined their
forces with England in the effort to destroy the Spanish fleet.
The commercial history of Holland rivals in interest that of
Venice, and those indefatigable people achieved a commercial
importance in the sixteenth and seventeenth centuries which en-
titles them to a prominent place in history. Their lands are
below the level of the sea, on the northwest coast of Europe,
and were reclaimed from the sea by building immense dykes.
Year after year and generation after generation this sturdy and
indomitable people fought back the sea, and the soil being but
a sediment of mud, under their careful cultivation, became a
fertile garden. They were a nation of agricultur-
andcharacter ^^^^' manufacturers and merchants. Abstemious
and self-denying to a degree, they handled the
products of the East as merchants, but denied themselves the
use of luxuries. At the time of Philip II they had already
become one of the richest and most prosperous provinces in
Europe. Their thrift was unsurpassed. Their cities of Antwerp,
Amsterdam and Eotterdam were the commercial centers of
northern Europe. These cities had been the seat of considerable
manufacturing during the middle ages. Woolen and linen goods
were the chief products. The first optical instruments and the
pendulum clock came from Holland. The art of printing
and book-binding had been carried to a high state of perfection.
Dutch ships had, centuries before, traded at the ports along
the shores of the Baltic Sea and distributed the products received
from Venetian merchants. Gradually the Dutch had built up
extensive fisheries, until at one time the herring fisheries of
Holland gave employment to 60,000 men. In 1614 a company
was organized for the special purpose of engaging
merM^t^Ho'me ^^ whalc fishing. At the beginning of the seven-
teenth century (1600) the carrying trade of Europe
was practically all in the hands of the Dutch. They also pos-
sessed a monopoly of the ship building industry, and nearly every
54 HISTORY OF COMMERCE.
country of Europe had its ships built in Holland. Agriculture
and cattle raising flourished extensively at this time, and to-
gether with its manufacturing industries placed the country in a
most pDosperous condition.
Having broken off with Spain, the Dutch immediately turned
their attention toward the commerce of the East. A number of
merchants combined to fit out ships for the long voyage, and
the venture proving highly successful, the great Dutch East
Dutch Com- India Company was formed in 1602, with a charter
merce in the f rom the government. This company was the pat-
tern of all future Dutch, French and English
companies, and had authority to take possession of newly dis-
covered land, make war or peace with the natives or other in-
habitants, erect forts, establish garrisons, and appoint adminis-
trative and judicial officers. Fierce and bloody conflicts with
the Portuguese in India and the far East ensued, but with the
help of the natives the Dutch drove them from Malacca in 1651
and from Ceylon in 1658. Java, Bantam, Amboina, Ternate
and the Banda Islands were opened up to Dutch commerce, and
even a slight footing in Japan was secured. In 1660 the Dutch
conquered Celebes, one of the last possessions of the unfortunate
and misgoverning Portuguese. With this extensive commerce
flowing directly into Holland, the Dutch grew in wealth at a
wonderful pace. Amsterdam became the Venice of the North
and the great banking exchange for Europe.
Having thus established a rich and successful empire in the
East, whose gains provided the means for further expansion, the
Dutch began to turn their attention to the Western hemisphere.
They fitted out several exploring expeditions, and one of these,
in charge of Hendrik Hudson, an agent of the
hl'the wlst'^^ Dutch East India Company, bent on finding a
western passage to India, sailed into New York
harbor in 1609 and discovered the river which bears his name.
Five years later the Dutch built a fort on Manhattan Island,
THE DUTCH. 55
which they purchased from the Indians for a sum equivalent to
$24 in our currency, and named the settlement New Amsterdam.
In 1612 the Dutch took possession of a number of the West
India Islands and established a colony in Guiana, South America.
Their western commerce was increasing, and anticipating that it
might equal or surpass their trade with the East, they formed
the "West India Company, which, however, proved anything but
successful financially.
The colonial policy of the Dutch was of the oppressive and
monopolistic character, similar in many respects to that of
Portugal and Spain, and the prosperity of their colonies was
not permanent. England came forward about the middle of the
seventeenth century as a rival to the Dutch in foreign commerce,
and passed a series of statutes in 1651 and 1660, called the
Navigation Acts, aimed at Dutch commerce. These brought on
a short but severe war with England, which resulted disastrously
for Holland. During this conflict the English forcibly took
possession of New Amsterdam and converted it into an English
colony, changing the name to New York. With the progress
of England and France the commercial power of Holland de-
clined. The Norwegians competed with them in the fisheries,
the Germans in the trade of central and southern Europe, and
Holland became, and has since remained, secondary in point of
commercial importance.
CHAPTER VI.
COMMERCE OP GERMANY.
HANSEATIC LEAGUE; EFFECT OF THIRTY YEARS' WAR; REVIVAL
OF GERMAN COMMERCE; ZOLLVEREIN; PRESENT COMMERCE.
In order to better understand the commerce of Germany
we must go back a little in point of time to the middle ages,
and glance at the civilization and commerce which had grown up
in the north of Europe. In the time of Charlemagne (768-814)
there were a number of important trading towns
Hansa Towns established, which grew into local centers of com-
merce. These began with Bruges in Flanders and
one or two Rhine cities in the west, and were scattered through
what is now Germany and Austria and along the coast of the
Baltic Sea as far as Russia. Many of these towns later organized
themselves into small republics, after the manner of the Italian
cities, for self-protection against the territorial lords, who, under
the Feudal system, ruled and plundered the country about them.
Then in order to protect themselves from common enemies,
such as the predatory inroads of barbarians and Turks, and the
pirates which infested the seas — chiefly the Northmen who
swarmed in the North and Baltic Seas — they formed themselves
into one grand combine, called the Hanseatic League. They
used the power thus acquired for gaining greater security for
their commerce.
The commerce of Europe during the middle ages may be said
to have been divided into two great dominions,
LeagS"^^^***^ '^^^•' ^^^ commercial cities of Italy in the south
of Europe and the Hansa towns in the North. The
connecting links between these two commercial domains were
the highways built chiefly by the Romans, and more especially
66
THE HANSA. 67
the rivers Ehine, Danube, Elbe and other waterways.
The centers of the Hanseatic League were Lubec on the Baltic
Sea, and Hamburg and Bremen on the other side of the Cimbric
peninsula. Later they were joined by Brunswick, Dantzig, Mun-
ster, Magdeburg and the ancient city of Cologne. The nobles
tried to obstruct the formation of this league, which was in a great
measure designed to withstand their exactions, but without avail,
and in 1300 there were eighty cities in the confederation, stretch-
ing from Belgium to the gulf of Finland. The towns were
divided into four colleges or districts, of which Lubec, Cologne,
Brunswick and Dantzig were the centers. The capital of the
confederation was Lubec, and there, once in three years, meet-
ings or congresses called "Diets" were held of delegates from
all the various towns of the confederation. At these congresses
the commercial interests of the various districts were discussed
and ways and means provided to improve the general state of
Proceedings of ^^adc, chicfly by affording security to property,
the Hanseatic The Mghways had been infested with robbers, who
ongresses plundered wagon trains of their cargoes as they
proceeded through the country, or dragged innocent travelers
into captivity and held them for ransom. These depredations
were chiefly instigated by princes and nobles who inhabited
strongly fortified castles upon almost inaccessible rocks, and
lived in ease and profligacy by means of their piracy upon com-
merce, both land and sea. In order to resist this wholesale
robbery the congress required each town to furnish its quota
of men and money for the general defense and punishment of
offenders both by land and sea, and in addition to this to main-
tain a militia of both cavalry and infantry proportionate to its
size or population. These were armed with cross bows, battle
axes, maces and lances. The martial spirit was kept up by
reviews. In addition to the regular militia, the larger towns
employed mercenary troops, the whole amounting to almost an
army. Thus peace and security were secured largely through
58 HISTORY OF COMMERCE.
the administration of the congress at Lubec, and as ^ result, an
astonishing success marked the history of Hansa commerce.
Under direction of the congress agents were appointed in the
different Hansa towns, with the special view of developing for-
eign commerce. Agencies were opened in new territory, and
some of these afterward became permanent settlements, as Lon-
don, England, and Novgorod, Eussia. In order to improve the
money systems prevailing, mints were established, in several of
the important towns, and although no uniform system of coin-
age was in use the coins of several towns were current through-
out a large extent of territory.
The proceedings of the Hansa congress are interesting on
account of it being the first purely representative body ever
convened for commercial purposes, and are especially valuable
as indicating the beginning of the idea of co-operation among
peoples having diverse interests. There can be no doubt but
these deliberations were highly beneficial in promoting civiliza-
tion as well as commerce, for we find from about the middle of
the fourteenth century evidence of a general improvement and a
rapid increase in wealth. By this union, piracy was driven
almost wholly from the North and Baltic Seas and compelled to
seek its prey on the shores of France or Britain; the vehicle and
caravan trade by land was protected, and a general spirit of
order began to prevail throughout central Europe, affording
Effects of the Security to property and promoting intercourse
Hanseatic amoug the pcoplc, thus beginning the dawn of that
eague intellectual and commercial awakening which was
to follow the night of the dark ages of lawlessness and ignorance.
The result was seen in the improvement in agriculture and
manufacture all over central Europe, and even in adjoining
countries. Fields were cultivated where forests stood before.
Towns and villages sprang up where huts were located. People
began to discard the use of the skins of bears and wolves for
clothing, and to substitute woolen, cotton and silk cloth. The
Longitude West from Greenwich 10°
Longitude
50
from
' 30°
GEHMANY. 59
League exerted its power and influence to protect shipwrecked
sailors from murder, a barbarity which had been all too common
before. It passed navigation laws, and improved the art of ship-
building. Its good work continued until the Thirty-years' war
(1619-1648) prostrated the commerce and industries of Germany,
and then its functions gradually ceased, after having rendered
inestimable service to the cause of commerce in mediaeval and
modern Europe.
Passing over the history of Germany prior to the Thirty-
years war, a history of wars, feuds, successions and religious
contentions, we find the country at the close of that conflict
almost depopulated in its rural districts, its commerce destroyed,
German Com- its people burdened with taxes, and its territory
ThTrtyv'earr divided iuto a multitude of small states. This
War war had been one of religion, and was character-
ized by all of the bitterness which usually accompanies religious
disputes. The only cities that survived the general ruin were
Lubec, Hamburg and Bremen, and these had suffered severely.
Seeing the decline of their commerce, these latter two cities took
up new lines of trade and kept up an active commerce with west-
ern Europe, providing the whole of North Germany with foreign
and colonial products, while Lubec continued to be the chief sea-
port of the Baltic trade. Little progress was made by Germany
in commerce or the industries during the next hundred years,
owing to its continual wars with France, Spain and other
nations. Nearly all of the articles then considered as luxuries
by the people, such as silk, glass, porcelain and gloves, were
either imported from England or France or manufactured
through government aid. The spinning and weaving of linen,
however, was engaged in to a considerable extent, as well as the
manufacture of woolen cloth. Prussia endeavored to encourage
the revival of the arts and industries by importing artisans.
Gradually agriculture and cattle raising increased to a consider-
able extent in the most fertile districts and a small export trade
grew up.
60 HISTORY OF COMMERCE.
About the middle of the eighteenth century (1750) commerce
showed a decided awakening, and it became necessary to im-
prove the banking and commercial facilities of the country.
Banks and trading companies were organized, and roads, canals
and harbors were built. Manufactures multiplied, and the volume
Revival of °^ ^^® exports and imports was greatly augmented.
German The cousumptiou of coffce, tea, rice and tobacco
Commerce largely increased, and the liberality of the German
court encouraged the importation of luxuries. Hamburg han-
dled the bulk of the imports from England and farther coun-
tries, and Bremen wheat from France. The Rhine and the Elbe
became great highways of commerce again, and the towns on
their banks once more began to grow and prosper. Each city
usually developed some peculiar industry. Thus Cologne mo-
nopolized the trade in Rhine wines; Leipsig the publishing and
book-selling trade; Frankfort-on-the-Main was the chief finan-
cial center of North Germany. Thus we see that by the middle
of the eighteenth century Germany had reached a high degree
of prosperity and commercial importance. Then came the war
of the American Revolution, which made a demand for German
products in England, and this was followed soon after by the
French Revolution and the Napoleonic wars, so that large quan-
tities of German agriculture and manufactured products were
exported and the country continued prosperous until it fell
under the iron heel of the Great Napoleon.
Immediately upon the invasion and subjugation of Germany
by Napoleon in 1805, he issued a decree that no more wheat
should be sold or shipped to England. This lost Germany a
good customer. Under Napoleonic rule (1805-1815) German
ports were in a state of semi-blockade, but this was not an un-
mixed evil, for it caused the people to turn their attention to
raising many products which they had heretofore imported.
The war in America had cut off the supply of tobacco, and now
its cultivation was begun and continued very successfully. Many
THE ZOLLVEREIN. 61
of the raw products heretofore imported to supply the factories
of Germany and for home consumption had now to be raised at
Deveio ment homc. Flax was largely grown; beets were raised
of Home and the beet sugar industry commenced. Cotton
Industries ^^^ ^^^l ^^^ ^^^ home mills were extensively
produced, and the manufacture of cloth was given a new
impetus. German mines so rich, were developed especially in
iron, coal and silver, and the people learned to rely upon and
develop the resources of their own country. Now that the
American colonies had become independent and England no
longer enjoyed a monopoly of their trade, a considerable com-
merce sprang up between them and Hamburg and Bremen.
These cities continued to reach out after the commerce of the
world with characteristic enterprise, and their ships carried on a
profitable trade with the West Indies and South America.
After the abdication of Napoleon in 1815 peace returned to
Europe, and German ports were thrown open to the manu-
factured products of England. The English had more improved
machinery and were able to turn out goods at less cost than the
factories of Germany. As a result English goods flooded the Ger-
man markets, and for a time produced a general depression and
stagnation in the industries of Germany. Hard times prevailed,
the cotton, iron and steel industries especially being depressed.
To remedy the difficulty, tariff laws were enacted. Germany
at that time was a loose confederation of independent states,
and hence there was very little uniformity in the tariff laws.
Several states would form themselves into a league
The zoiiverein ^ud cuact Uniform tariff laws, then other leagues
of states were formed, and finally after several
years the tariff laws became uniform through the efforts of the
Customs Union or Zoiiverein. Treaties of commerce were made
by the Zoiiverein with England, France and other European
countries, and the industries of Germany became prosperous
again.
62 HISTORY OF COMMERCE.
By the year 1830 the revival of trade and industries in Ger-
many had fully set in. New machinery had replaced old meth-
ods in the silk, woolen and cotton factories, and now woolen
goods formed a very important part of the export trade. Iron
and steel industries sprang up, incident to the advent of the
age of machinery. Glass, paper, pottery, porcelain and hardware
Revival of became extensive products, as well as chemicals,
German dycs, sugar and beer, all of which were largely
Commerce exported. After the Franco-Prussian War, the
German states including Prussia were united into a compact
government, and King William was crowned Emperor of Ger-
many in the Palace at Versailles. This event brought unity to an
incoherent collection of petty states, and under the skillful
leadership of Prince Bismarck the new empire has steadily
grown in power and influence until it now ranks as the second
nation of Europe in wealth and commercial importance. Ger-
many is rapidly changing the character of her industries and
becoming a manufacturing and commercial^ rather than an
agricultural nation.
In the past fifty years the manufactures of Germany have
nearly doubled, its commerce trebled, its shipping increased
five fold, and its mining six fold. Her production of iron has
The Present increased ten fold in fifty years. Her mines give
Commerce of employment to over a half million men. By the
ermany ^^^ ^^ labor-saviug machines one man can now
produce as much as three men could produce fifty years ago.
Germany has 750 factories devoted to the making of machinery
alone. One of these, the Krupp Gun Works at Essen, is the
largest in the world, employing 20,000 men and covering a
space of one thousand acres. Hamburg and Bremen still lead
as ports of entry. Dantzig is the chief seat of its great export
trade in timber, grain, flax, hemp and potatoes. Leipsig is the
greatest fur market in the world, and the seat of the book
publishing trade. Frankfort as a financial center has been
THE ZOLLVEREIN. 63
compelled to take a place second to the capital, Berlin. Dresden
is noted for its porcelain and Nuremburg for its clocks and
watches.
Germany has given considerable attention to the practical
education of her people, especially in the field of commercial
education. Her commercial success is no doubt attributable
in a large degree to her system of education. Her artisans are
not only skilled in their trades, but a large proportion of them
are men of high scientific attainments in the branches pertaining
to their work. Since the learned professions and official positions
are the exclusive preserves of those born to social rank, the
educated commoner must of necessity betake himself to manu-
facture, trade or commerce, and it follows that much of the best
brains of the empire is devoted to business pursuits.
CHAPTEK VII.
COMMERCE OF FRANCE.
FLEMISH COMMERCE AND MANUFACTURES; AGE OF LOUIS XIV;
COLONIAL POSSESSIONS; REVOCATION OF THE
EDICT OF NANTES.
Before entering directly upon the history of French com-
merce, let us refer briefly to a small country called Flanders,
which during the middle ages existed and flourished directly
north of France, upon the shore of the North Sea, occupying a
portion of what is now Belgium. We have already had occasion
Commerce and ^^ allude to the trading ships of Venice and Genoa
Manufactures and their voyages northward along the coast of
France as far as Flanders. Numerous testi-
monies are found in history as to the flourishing condition of
Flemish manufactures as early as the twelfth century. The
weaving of woolen cloth was their most important industry, and
a writer of the thirteenth century asserts that "all the world
was clothed from English wool wrought in Flanders." This is
an exaggeration, but Flemish woolens were probably sold wher-
ever the sea or a navigable river permitted them to be carried.
England and Spain furnished the raw wool and Flanders worked
it up into cloth. English wool was superior to the Spanish for
fine cloths, and the Spanish wool was mixed with the English in
the production of medium grades of cloth. Bruges and Ghent
were the two chief manufacturing and commercial centers of
Flanders, and each of them at one time had not less than forty
thousand looms constantly at work.
Bruges was the termination of the route down the Ehine
from Italy and the East, and before Lisbon eclipsed her, through
the rise of Portuguese commerce and discoveries, was the chief
64
FRANCE. 65
distributing point whence cargoes were transhipped for the
Hansa towns. Here the products of Asia and Africa^ as well
Flemish ^^ Europe, came to be exchanged for the woolens.
Growth and vclvets, silks and linen fabrics from the looms of
^''^^""^ Flanders and Netherland cities. In the latter
part of the fourteenth century Bruges was a market for the
traders of the world, and we are told that "merchants from
seventeen different kingdoms had their settled domiciles there,
besides strangers from almost unknown countries who repaired
thither."
The reason for the decadence of the commerce and prosperity
of Flanders may be found in a combination of causes, one of
which was that England gradually established manufacturing
industries of her own and began to weave not only her own
cloth but that of other nations, thus depriving Flanders of
her most profitable customers; another was in the rise and com-
petition of the Hansa towns, which destroyed the monopoly of
Bruges as a distributing point and commercial center; the growth
of Portuguese commerce which transferred the distributing cen-
ter from Bruges to Lisbon; the growth of Dutch maritime com-
merce directly with India, by which transhipment of cargoes no
longer became necessary either at Bruges or Lisbon. What was
lacking to complete the ruin of Flemish commerce and manu-
factures from these causes, was easily furnished near the close
of the sixteenth century by the religious wars and persecutions of
the weak and narrow-minded Philip II. Antwerp drew away a
portion of the commerce of Bruges; many of her weavers emi-
grated to England, and the political control of Flanders passed
to Spain, Austria and thence to France.
French commerical history may be said to begin about
the period of Louis XIV (1643-1715), about the middle of the
seventeenth century, for prior to that time the industries and
commerce of the natioti were in a very backward state. French
merchants had, for a century before, been trading in a small
CG HISTORY OF COMMERCE.
way along the west coast of Africa, and French colonies had
been planted in Madagascar and some of the islands adjacent
thereto. The French had also made some efforts
commercr^ to establish a footing in India, and in 1624 the great
French East India Company was formed for the
purpose, but later it was driven out by the English. The French
do not appear to have been navigators or explorers like the Portu-
guese or Dutch, and except in North America were never very
successful as colonizers. Internal commerce in France was like-
wise in a neglected and undeveloped condition prior to the
advent of Louis XIV. Silk raising and weaving had been carried
on to a limited extent during the sixteenth century, and the
manufacture of woolen goods spread from Flanders into north-
ern France and along the banks of the Ehine. Agriculture was
very much neglected, and the peasants were unmercifully taxed
to support an extravagant and dissolute nobility and maintain
the succession of wars which cursed the realm. What with the
Hundred-years war with England (1337 to 1453); the massacre
of the Huguenots on St. Bartholomew night (Aug. 24, 1572), by
which 100,000 persons were murdered in cold blood; the perse-
cutions of the Jews, resulting in driving thousands of industri-
ous and peaceable citizens from France, and the constant strife
and commotion which prevailed, is it any wonder that commerce
was at a low ebb?
The reign of Louis XIV has been called the Golden Age
of France, in material prosperity as well as in art and literature.
It was to France what the Elizabethan age had been to England.
Louis XIV was called the Grand Monarch, and such he proved
to be in many respects, displaying remarkable
Louis ?iv talents as a ruler. He surrounded himself with
men who merely executed his will, and in the
choice of these he showed rare ability and judgment. His min-
isters, especially Colbert, the great promoter of French industry,
manufactures and trades, were men who surpassed the statesmen
FRANCE. 67
of most other countries of the time. Colbert's activity was
unflagging. He set himself to develop the country on every side.
He especially devoted himself to building up manufactures and
commerce, the construction of routes of travel by both sea and
land. He revived old manufactures and introduced new-
ones, such as tapestries, silk mosaics, cabinet work, lace,
pottery, steel work, and the like. Fine cloth had hitherto
been brought from England, but by his judicious patronage its
manufacture was established in France. By encouraging the
growth of mulberry-trees he enabled the silk manufacturers to
dispense with the importation of raw silk. The art of making
plate glass was imported from Venice, and the name "French
plate glass" is synonymous with excellence to this day. The art
of carpet weaving he introduced from Turkey and Flanders, and
in these the French soon learned to excel their masters. A ma-
chine for weaving stockings was introduced from England; tin,
steel, porcelain and morocco leather, hitherto brought from
foreign countries, were now manufactured in France.
The development of French colonial ambition was also due
largely to the sagacity and labor of Colbert. The French had not
been very successful in the East, but Colbert turned his attention
to the more promising field of the western world. Before James-
town was built or the Pilgrims landed at Plymouth Rock the
French had planted feeble colonies in New Foundland (1535)
and Nova Scotia (1602). This territory, called "Arcadia," was
p^g„j.j^ ceded to England by the treaty of Utrecht in
Colonial 1713.* They also made settlements in New
Possessions Brunswick (1672) and Cape Breton Island (1714),
but the most important French colony was that of Canada
*0n account of the disloyalty of the people to England, which amounted
to openly assisting the French in the wars which occurred between the
two nations, the people of Arcadia were inhumanly punished by England in
1755. Seven thousand of them were forcibly put aboard ships and trans-
ported to the English colonies, where they were scattered around. Their
villages were burned and their fields destroyed.
68 HISTORY OF COMMERCE.
(1608) which lay along the St. Lawrence with its post of Quebec.
From this Frencji missionaries and explorers pushed further
west, and were the first white men to behold the Falls of Niagara
and explore the Great Lakes. Trading posts were established
by them in the region around the Great Lakes, and later these
became centers and rallying points of civilization. Such were De-
troit and Chicago. In 1673 Fathers Marquette and Joliet discov-
ered the Mississippi Eiver and sailed down it to Arkansas. Nine
years later Eobert de La Salle completed the work which they
had begun by passing down the river to its entrance into the
Gulf, and taking possession of the country on its banks and at
its mouth in the name of his king, in whose honor he nanied
it Louisiana.
It became one of the ambitions of Louis XIV to glorify his
reign by creating for France a colonial dominion on the banks
of the great "Father of Waters" which would rival or eclipse
the flourishing colonies of England on the Atlantic coast. Ac-
cordingly several expeditions were sent out from time to time
to colonize the new territory of Louisiana; the Mississippi Com-
pany was formed under the management of the visionary finan-
cial theorist, John Law. Money was lavished upon the enter-
prise, and emigrants were sent thither. New Orleans was
founded and settlements made up the river as far as the present
city of Natchez. Upon this sickly colony and previous explora-
tions the French laid claim to the whole Mississippi Valley and
the vast domain stretching away to the northwest.* But the
English claimed that their possession of the Atlantic seacoast
carried with it a valid title to the country in the interior for
an indefinite extent westward. In conformity with this idea
*The Louisiana Territory purchased in 1803 by the United States from
France extended northward to practically the boundary line of British
America. This boundary was somewhat indefinite. Thence it extended
westward to the territory of Oregon and took in the whole of the United
States west of the Mississippi river except Texas, V^ashington, Oregon,
California and what the United States got from Mexico by treaty and
purchases.
PRANCE. 69
the charters of several of the English colonies read to include
territory stretching across the continent from sea to sea. This
Contentions was the basis of the conflict between the English
between Eng. ^^^ French colonies in America. When the two
Usn ana v rencn
Colonies nations were at peace, the controversy led only
to border disputes, but when England and France were at war,
their respective colonies in America also engaged in a murder-
ous conflict, intensified and made more shocking by the Indian
element enlisted in it. A plan was formed by the French to
construct a line of forts stretching from Lake Erie down the
Ohio Elver, and thence down the Mississippi to Louisiana, thus
hemming in the British settlement on the east of the Alle-
ghaneys. This project soon brought on a conflict with the Ohio
Company, an association formed in London and Virginia, which
had obtained from the crown a large tract of land along the
Ohio River, where it had erected trading posts. George Wash-
ington, then a young officer in the militia service, was sent out to
warn the French away. Receiving an unsatisfactory answer.
General Braddock with a body of troops was later sent out to
drive them away. The story of the conflict which followed,
lasting ten years (1753-1763), resulting in the campaign against
Quebec and the death of Wolf on the Heights of Abraham, is
familiar history. By the treaty of peace which followed the
French relinquished all claims in North America except the
Territory of Louisiana.*
Colbert applied himself diligently to building up manufact-
ures at home and commerce abroad. He encouraged traJe with
the French colonies in Canada and the West Indies,t as well as
with the Mediterranean coast and Africa. Under his influence
heavy duties were imposed on imports in order to stimulate
♦By the treaty of Utrecht in 1713 the French had ceded to England,
New Foundland, Nova Scotia, New Brunswiclc and the Hudson Bay Territory.
f Prance acquired Guiana in 1626, colonized Guadeloupe in 1634 and Mar-
tinique in 1635. Acquired a portion of Hayti in 1697, which it held until
1797.
70 HISTORY OF COMMERCE.
home productions, and bounties and subsidies were given to en-
courage exports. Commercial treaties were formed and trading
companies organized to develop new fields of pro-
Home*'°"^^* duction and commerce, such as the Territory of
Louisiana. The imports at the time were
chiefly raw silk, wool, flax, cattle and colonial products, coffee,
sugar, tobacco and spices. The exports were mostly wine, fine
silk goods, and woolen cloth. But notwithstanding the efforts of
Colbert and the great ability which he displayed in fostering the
commercial interests of France during the reign of Louis XIV,
the prosperity of the kingdom did not rest upon a stable and
permanent foundation. The wars which were waged by the king
for the purpose of enlarging his realm and glorifying his reign
made France under Louis XIV the foremost power in Europe,
but drained the country of money and men. The oppressive tax-
ation necessary in order to carry on these wars, maintain an ex-
travagant court and withal construct the grand palace and
gardens at Versailles, which outshone all the kingly palaces of
Europe, together with the religious dissensions and persecutions
which stirred up the country, made commercial and industrial
progress and prosperity difficult and uncertain. Had it not been
for the natural productiveness of the fields and vineyards of
France, and the rich territory of Alsace, Burgundy and Flanders
wrung from Germany as trophies of the Thirty-years war, it is
difficult to conceive how the people could have carried their
burden.
One of the most serious blows to the prosperity of the peo-
ple, as well as the greatest blot of shame upon the reign of
Louis XIV, was his persecution of the Huguenots. He believed
Revocation ^^^^ ^^^ Unity of the church was inseparable from
of the Edict a perfect monarchy, and hence began a series of
of Nantes oppressive proceedings against all dissenters from
the established religion. Colbert, who esteemed the Hugue-
nots as active, industrious and thrifty citizens, prevented for a
FRANCE. 71
time these violent measures, but his influence was not sufficient
to stay the hand of illtempered religious zeal. The Huguenots
were excluded from office and denied many civil and political
rights. The number of their churches was limited, and these
were confined to a few of the principal towns; children were
torn from their parents and brought up as Catholics, and finally
companies of cavalry were sent among these quiet people to
coerce and intimidate them. At' last (1685) came the Revocation
of the Edict of Nantes, taking away all rights from them. Their
religious worship was forbidden, their churches were destroyed,
their preachers banished and their schools closed. When the
emigration from the realm became so serious as to be really
alarming, it was strictly forbidden, and the shores and bound-
aries of France were closely guarded. But despite threats and
guards, more than half a million industrious, law-abiding and
wealth-producing citizens left France, carrying with them their
industry and their faith. Many of them went to England, and
others to Holland, carrying their silk manufacturing and stock-
ing weaving with them. Still others settled in Switzerland and
Germany, while a few found their way to America and settled in
North Carolina.*
*The Edict of Nantes was a decree of toleration issued by Henry IV in
1598 guaraoteeing freedom of worsliip aud equality of riglits to Protestants.
CHAPTEE YIII.
COMMERCE OF FRANCE— Continued.
COLBERT; JOHN LAW; THE FRENCH REVOLUTION; NAPOLEON'S
POLICY; RECENT FRENCH COMMERCE.
Louis XIV lived to see his kingdom torn and distracted, his
conquests lost, a large portion of his colonies in the possession
of his enemies, and a smouldering hatred for each other arise
among his subjects. Monopolies were multiplied in order to
meet the needs of the nobles, of whom there were one hundred
and forty thousand in France at that time. Together with the
clergy, they owned the best mines and farm lands; all of the
large and handsome buildings, the palaces and castles and even
the best of the movable property. They escaped taxation, dis-
dained labor and eagerly seized and consumed the hard-earned
products of the poor laborers. Under the wanton luxury of
his successor, Louis XV, silk weaving revived some-
Loyfs^xv what, and agriculture improved, but the country
was practically bankrupt. Farmers were nearly
everywhere poor renters of their small holdings, weighed down
by tithes and heavy taxes, while the lords lived in their castles or
in the principal towns or Paris, squandering the income wrung
from their miserable tenants.
About this time there appeared in France one John Law,
a Scotchman, who ojffered a solution of all the country's diffi-
culties. He proposed to liquidate the vast indebtedness with
which the ambitious schemes of Louis XIV had burdened
France. This was so enormous that the whole annual revenue
scarcely sufficed to pay the interest. He founded a Land Bank
(1716) and organized the Mississippi Company. In consider-
ation of his liquidating the public debt, his bank was made a
73
MISSISSIPPI BUBBLE. 73
state institution and authorized to issue a paper currency. He
then issued inconvertible notes to the amount of the value of
John Law the land of the kingdom based upon the land itself
Mtssls^r^l^"** as a supposed security. France was flooded with
Company this inflated currency. Prices of all commodities
rose, the rate of interest advanced, and stock in the bank
was in great demand. Law was able to declare a bank dividend
of forty per cent, payable in paper money. Seeing that Law was
such a remarkable financier and his bank so prosperous, the peo-
ple were eager to participate in his Mississippi scheme. The desire
to purchase shares in this scheme now amounted to a frenzy.
Enormous profits were expected to be realized by the Mississippi
Company from its supposed gold mines yet undiscovered, and
from planting and commerce. The new company grew and
expanded, absorbed the East India Company, increased its capital
stock to six hundred and twenty-four thousand shares of five
hundred and fifty francs each, and offered to lend the govern-
ment a billion six hundred million francs at three per cent.
Paris was wild with excitement. The shares in the Mississippi
Company rose in the market to forty times their par value.
Everybody seemed to grow rich. Law worked his two schemes,
the bank and the Mississippi Company, side by side, and one
helped the other. Through the bank he inflated the currency,
making it possible to float the Mississippi scheme, and as fast
as the stock of the Company was sold, the money flowed back
into the bank, enabling it to be used in making bank dividends.
Government bonds, which a short time before had been selling
at twenty cents on the dollar, so low was the credit of the king-
dom, were redeemed by Law at par, and investors became eager
to buy government securities. Land was bought and sold at
fabulous prices. New issues of paper currency continued to be
made until the total reached almost to the enormous sum of
two thousand million francs. All the while the specie was quietly
going out of France, and there was nothing but credit left as a
U HISTORY OF COMMERCE.
basis for the money circulation. Finally, after four years of
financial rioting in the wildest schemes and theories, credit
became strained to the breaking point. The bubble burst and a
panic ensued. Law became a fugitive. Kuin and despair spread
through the kingdom, and an insurrection of the common people
was imminent, but with great difficulty was prevented. The
terrible day of reckoning had not yet come. It is a strange co-
incidence that while the Mississippi scheme was in operation in
France a similar gambling mania, in the form of the South Sea
Bubble, held possession of England, and another of the same
kind infatuated Holland. They all three collapsed about the
same time and with the same effects.
After the failure of John Law's scheme, the commerce
of the country was depressed and manufactures did not improve.
In 1756 began the Seven-years war (1756-1763) with
England, by which France lost all of her American
colonies except Louisiana. The commercial su-
Reaction*" premacy of Europe, and of the world, then passed
over to England. The treasury of France was
empty, the country in debt, credit gone, and the people borne
down with financial burdens. The new king (Louis XVI) was
weak and injudicious, and the queen frivolous and extravagant.
The war for American independence had been brought to a
successful issue, and had aroused the spirit of popular liberty
in France. Under these conditions the common people in 1789
rose in revenge for the wrongs they had suffered for centuries,
and inaugurated the great French Revolution.
Peaceful commerce could not exist during a reign of anarchy.
Terror made property insecure, and the wealthy fled from the
country, carrying their portable wealth with them.
Resolution ^^ scarcc had coin become in the first year of the
Revolution, that large issues of paper were re-
sorted to, and it was made a capital offense to refuse to receive
this at par; but foreigners were not bound by the statute, and
UNDER NAPOLEON. 75
took from the country all of the gold and silver that was not
hoarded. The paper currency sank lower and lower in purchas-
ing power, until a pound of butter could not be had for less than
700 or 800 francs, and a pair of boots cost as high as 10,000
francs. Internal trade and manufactures were prostrated and
foreign commerce annihilated.
At this juncture Napoleon appeared upon the scene of action,
and in 1806 issued what has been called his Berlin Decree, by
which he hoped to destroy British commerce by sealing the ports
of the entire continent against English vessels. England retali-
ated by capturing French ships and colonies, and thus for several
years the ports of Europe dared not admit English vessels for
fear of the wrath of Napoleon nor permit their own vessels to
leave their moorings for fear of British cruisers.
Poiicy*°°** ^^^ commerce of Europe as well as England was
thus seriously injured, while the decree caused
manufactures and home industries in France to revive, in an
effort to meet the demand for goods which could not be im-
ported. Napoleon laid down the principle that France should
be self-sustaining in the production of all that was necessary
for her maintenance. He increased the duties on imported
goods, rigorously protected trade marks, and re-estab.lished
several of the old trade corporations. To supply the loss of
colonial produce, no longer obtainable from the English colonies,
tobacco and corn were cultivated, and for the purpose of making
sugar to take the place of cane-sugar, no longer obtainable from
San Domingo on account of the negro revolution, beet-sugar was
invented and the beet extensively cultivated. Cotton, linen and
woolen goods were extensively produced and manufacturers were
busy, but not having to compete with foreign imports clothing
was neither good, cheap, nor abundant. Eoasted beans were
substituted for coffee, soda for potash, and bleaching, dyeing,
tanning, distilling and other arts depending upon chemistry
were greatly promoted by means of ingenious substitutes.
76 HISTORY OF COMMERCE.
"To Napoleon is due the creation of Chambers of Commerce
and Manufactures, of the Conseils de Prudhommes or mixed
juries of the most skillful operators and masters for settling
industrial disputes, workmen's certificates, and the institution of a
property in trade marks. He constructed and repaired ten thou-
sand miles of roads, crossing in some instances mountains by
highways worthy of the Eomans, built bridges and canals, and
beautified Paris/*
One of the beneficial effects of the Revolution was the change
in the tenure of land in France. Prior to that event enormous
estates were held by the nobility and aristocracy, which had
descended from generation to generation without division. It
was ordained that thereafter estates should be equally shared by
all the children of a proprietor dying intestate. This soon result-
ed in dividing the soil into numerous small allotments, as it is
to-day, resulting in better cultivation of the land and a more
thrifty and better contented peasant class.
After the battle of Waterloo and the final abdication of
Napoleon, it was hoped that France would see a return of peace
and a revival of commerce, but for several years in succession
her harvests were poor, taxes to defray the expenses of the
previous wars continued heavy, and the country seemed politi-
cally and commercially exhausted. Its foreign trade had been
so long lost that it had to be built up anew, and this proved a
slow process, for other nations had secured possession of the
markets. Meanwhile machinery had greatly improved in En-
gland, and its exportation being strictly prohibited by Parlia-
Pj.q^ ment, England was able to undersell France. But
Waterloo to the French bent their energies with vigor to the
apoeon II ^^^^ ^^ building up their industries, and soon
so distinguished their wares by the excellence of their quality,
that in ten years they were abreast of their rival, England,
in many lines of manufacture and in bleaching and dyeing they
far surpassed her. In 1825 the prohibition against the exporta-
FRANCE. 77
tion of British machinery was repealed, and this left the French
free to profit by English inventions. A general desire for in-
dustrial improvement seemed to pervade France, and capital
returned to the channels of industry and commerce. Silk and
cotton weaving, paper making, carpet weaving, tanning and kin-
dred arts, all became prosperous. Agriculture, however, failed
to show a corresponding degree of improvement, owing, no
doubt, to adverse or indifferent legislation. Although 53 per
cent, of the French people depended upon the cultivation of the
soil for their subsistence, wooden plowshares, harrows with
wooden teeth, and in the southern provinces, the Oriental mode
of oxen treading out the grain, still remained in use up to the
time of Napoleon III.
The policy of Napoleon III was favorable to agriculture and
commerce. He encouraged the rearing of fine draft horses and
the introduction of improved implements and methods of agricul-
ture, thus raising the tillage of the soil to a place befitting the
dignity of his empire. Unlike his predecessors, he did not
Commerce regard the use of foreign products by his people as
Napo'ieoniii prejudicial to home indu^ries, but rather as a
1848.1870 stimulus to better skill on the part of the me-
chanics and artisans of France. Accordingly he reduced the
duties on foreign goods and especially on foreign machinery, with
a view to encouraging its importation from England and the in-
troduction of improved processes of English manufacture. The
rapid extension of the use of machinery in France under Na-
poleon III, the introduction of steam power and the invention
of the Jacquard loom* for weaving all kinds of figured goods,
gave a great impetus to the industries of the country. In ten
years, 1858-1868 the exports of France increased from 1,750,-
000,000 francs to 3,000,0000,000 francs, the effect largely of the
♦Jaquard was mistreated, his looms destroyed and he finally exiled for
his invention, but he lived to be regarded as the father of modern French
industry.— Yeats Vicissitudes of Commerce.
78 HISTORY OF COMMERCE.
so-called Cobden treaty with England made in 1860, which
greatly reduced the duties on foreign imports.
In 1867 a grand Universal Exposition was held in Paris
by which France showed to the world what excellent progress
she had made in the arts of peace. The intelligence, ingenuity
and enterprise of her inhabitants were here wonderfully dis-
played, and it was apparent that in the production of fine silk
and woolen goods, wines and brandies, furniture, glass, clocks
The Universal ^^^ artistic wares, as well as in art and matters oi
Exposition of tastc and education, France stood second to no
^^^ nation, if indeed she did not surpass all others.
Three years after the Exposition (1870) the Franco-Prussian
war broke upon the country, resulting in the defeat of her
armies, the capture of the Emperor, Napoleon III, the loss of
her valuable provinces of Alsace and Lorraine, and the payment
to Germany of an indemnity of 5,000,000,000 francs.
Notwithstanding these disasters, the trade and industries of
France quickly revived and resumed their former prosperity.
The wonderful natural productivity of France again mabifested
itself, and the war indemnity, enormous as it was, was quickly
paid. There were in 1872 more than 200,000 hand looms
besides 80,000 power looms at work in France, giving rise to a
secondary but very important industry in the con-
Recent French structiou of their machinery. Lyons and the
south of France produced large quantities of silk
goods, and woolens were woven extensively in the north, while
Eheims and Amiens turned out Cashmere shawls and other
textures of long-fibered wool, exceeding in beauty the famous
fabrics of India. Eouen on the Seine became the seat of the
cotton industry, and received the title of the "Manchester of
France,'^ while Havre at the mouth of the same river corre-
sponded to Liverpool as the depot for the importation of raw
material and the place of export for the manufactured article.
Agriculture, stock raising and wine growing flourished, and glass,
FRANCE. 79
porcelain, and fancy articles of jewelry and furniture were pro-
duced in considerable quantities and found a ready market. The
Bank of France, established in 1803, became the great central
financial agent of the country second only in consequence to the
Bank of England, while the Paris Bourse took rank as one of the
great Stock Exchanges of the world.
Although one of the Great Powers of Europe, France has
never, since the sale of Louisiana, possessed extensive colonies.
Her West Indian possessions and the settlements in Asia were
too small to affect either her commerce or revenue. Algiers was
acquired in 1830, but never proved remunerative
coionii Trade ^^ France. Several small holdings on the west
coast of Africa yield valuable products in ivory,
gold, oil and cotton, and recently France has acquired a footing
in Indo-China from which she derives silk and rice. Colbert's
East India Company planted four small settlements in Madagas-
car, and that island may prove a profitable holding in the future.
During the past quarter of a century, as compared with
Germany and England, France has been losing ground as one
of the great nations, and has failed to make the progress which
her natural advantages of soil and climate should enable her
to make. The upper classes are excessively fond of dress, pleas-
ure and military glory, and, as a result, the energies of the
nation have not been well directed. The national debt is the
greatest, per capita, of any nation, being seventeen and one-half
times as great as that of Germany, six times that of the United
States and one and one-half times that of Great Britain. The
bulwark of France is in the stability of her peasantry. These
Present surpass in industry, thrift and frugality all other
Condition of pcoplcs of Europc, and if France were well gov-
erned, its prosperity would equal if not surpass
its neighboring nations. Rural France is divided up into 3,500,-
000 small farms, a large majority of which are cultivated by the
owners, thus giving a self interest and stability to the population
80 HISTORY OF COMMERCE.
and to agriculture of the greatest value to the nation. Having
ready markets near at hand in Paris and other large cities, a
considerable portion of these farms are devoted to raising small
but profitable crops, such as potatoes, fruit, poultry and the
like. In 1882 the vineyards of France were ravaged by an insect,
entailing a total or partial loss of over 4,000,000 acres, valued at
$1,000,000,000. The pests were finally exterminated, but the
wine industry was prostrated, and since that time a large portioA
of the wine used in domestic consumption has been annually
imported.
In 1900 the French gave another great Exposition in Paris,
to exhibit at the close of the century the progress of the world
in the arts and sciences. Within the palaces of that exposition
were gathered the best products of the hand and brain of man
from all parts of the world. It was apparent that France was
abreast of the great nations in processes of manufacture, and
that in articles of luxury, such as silk, glass, porcelain, jewelry,
furniture and brandy, she surpassed all other nations in the
artistic character of her wares.
CHAPTER IX.
COMMERCE OF ENGLAND.
BEFORE THE NORMAN CONQUEST; ENGLISH WOOL; ELIZABETH'S
POLICY; CARRYING TRADE.
While the Mediterranean was dotted with the commerce of
the Phoenicians and Carthaginians, the British Isles were in a
semi-barbarous state, the inhabitants living in huts and possess-
Ancient ^°S ^^® rudcst implements to supply the bare
English necessaries of life. The ancient commercial his-
Commerce ^^^^ ^£ thesc islands gave no indication of the
greatness which the empire of Britain was destined to achieve
in the domain of commerce and manufacture in modern times.
Separated from the mainland of Europe and the highways of
Mediterranean civilization, the Britons remained passive, and
waited at home for traders, chiefly the Phoenicians and Cartha-
ginians, who visited their coasts, supplying them with trinkets in
exchange for tin and lead ore found in abundance lying near the
surface. Little progress was made in the scale of civilization
until after the Roman conquest. The wealth of coal and iron
stored up in these islands was unknown. Herds of wild cattle
and other animals roamed through the dense forests which at
that time covered most of the area. Little attention was paid to
agriculture and the natives lived chiefly upon fruits and the
products of hunting. The invasion of the Romans infused new
life and intelligence into the people, and gave an impetus to
their civilization. Thereafter hides, wool and furs are named
as among their exports. English wool came to be so esteemed
that merchants dealing in it were exempted from the peril of
capture in war. Eventually wheat and cheese began to be
regular articles of export.
81
83 HISTORY OF COMMERCE.
Under Eoman rule (B. C. 54-A. D. 455) the Britons partook
to some extent of the refinement of their masters, and reached
a higher state of commercial development than they again at-
tained for several centuries. These enterprising rulers built
roads, cleared forests, drained marshes, opened mines, improved
agriculture, founded towns, and introduced a thor-
Britain under -u j • l £ j_ i • i
Roman Rule ough and vigorous sjstcm 01 government which
was of the greatest benefit to the people. Under ,
the reign of the Eoman emperor Augustus, we find that a con-
siderable commerce had grown up, and Britain exported gold,
silver, lead, tin and iron, besides considerable quantities of wheat,
cattle, skins and wool. The imports were chiefly articles of
luxury such as ivory, gold ornaments, amber and articles in
glass.
After the decline of the Roman Empire and the withdrawal
from Britain of its energizing and protecting power, came in-
vaders from the mainland of Europe, the Saxons, Normans and
Saxons Danes, who plundered the people, disturbed their
Normans institutions and ruined their commerce. Pirates
ravaged the coast, and trade was checked by
rapine and lawlessness, so that few foreign merchants would
risk life and property for the profits of commercial intercourse
with Britain. Now and then an enlightened king would en-
deavor to cultivate and revive commerce and the arts of peace,
but the history of English commerce is almost a blank until
the time of King Alfred the Great (A. D. 870). He founded a
navy of war galleys, each rowed by sixty or eighty men, in order
to protect his merchant ships from the depredations of pirates,
encouraged trade by cultivating friendly relations with foreign
countries, and sent embassies even as far as India on missions
of commerce.
During the Middle Ages, the Baltic and North Seas were in-
fested with pirates, chiefly Northmen, who regarded the mer-
chant ships of neighboring states as their natural plunder, This
ENGLAND. 83
open highway robbery on the seas was for centuries the common
employment of the younger sons of the royal and noble families
of Denmark, Norway and Sweden, and was con-
Piracies sidcrcd a legitimate field in which they could win
fame and fortune. During the eighth and ninth
centuries the coasts of England, Scotland and France suffered
severely from the ravages of these pirates, and as previously
stated, one of the incentives to the formation of the Hanseatic
League was the mutual protection of the towns against piracy.
Furthermore, at that distant and unenlightened period, human
jealousies and rivalries were stronger in many instances than
the instincts of right and justice, and trading towns often re-
garded the seas as the domain of the strongest and committed
acts against rivals which would now be regarded as piracy.
Individuals undertook to enforce, on their own account, repara-
tion for maritime wrongs, and were not particular when the
real offender could not be reached in substituting another.
An important feature of the internal commerce of England,
and other parts of Europe as well, during the Middle Ages,
was the annual fairs which were held in the principal towns.
These fairs were the means of bringing buyer and seller together,
and a general interchange of commodities resulted. Owing to
the limited facilities for travel and transportation
Middle Ages ^^ goods, the lack of roads and vehicles, and the
fact that the people traveled but little, it was a
great convenience to have a common meeting time and place,
where articles of manufacture from distant parts of the country
or world could be exchanged, and the wants of the people thus
supplied. The location of these fairs was usually determined
by the question of convenience, the size and importance of the
town, or the fact that a certain point was a shrine whence came
pilgrims periodically to worship. Thus Mecca continues to
hold a fair, where large quantities of goods are sold annually.
The principal English fairs in the Middle Ages were: That of
84 HISTORY OF COMMERCE.
London, known as St. Bartholomew's Fair, where wool and cloth
were the chief articles sold. This fair was not entirely abolished
until 1840. The fair at Winchester, where large quantities of
wool were sold; and the great fair of Stonebridge, to which
came merchants from all parts of Europe. This fair continued
a month, and being near the coast was attended by "merchants
of Venice and Genoa, with stores of eastern produce and their
own manufactures of silks, velvets, cotton goods and glass. The
Flemish brought the fine linens and cloths of Bruges, Liege,
Ghent and other manufacturing towns. French and Spanish
merchants came with their wines and fruits; the great traders
of the Hansa brought furs and amber, iron, copper and other
metals, flax, timber and grain, and all the products of the north.
In the same way the English farmers, or traders acting on their
behalf, carried to this fair, hundreds of huge sacks of wool for
the manufacturing towns of Europe, barley for the Flemish
breweries, with corn, horses, cattle, and many other goods."*
As means of transportation and travel improved these fairs
gradually declined, and in the age of railroads and steamships
have disappeared almost entirely as trading centers. The local
store and the traveling salesman have superseded them. The
principal fair in existence at the present time is that at Nijni-
Novgorod in eastern Russia, which owes its existence to the prim-
itive condition of that part of the country, and the lack of trans-
portation.t
The Norman Conquest brought a change in dynasties in
England, and with it contentions which retarded the progress of
commerce. The Feudal system fettered vassals, while nobles
♦Gibbins' History of Commerce.
fThis fair lasts six weelis and is visited by 300,000 people from central
Asia and Europe. A town of stone consisting of 5,000 shops or bazars laid
out in streets has been erected for this fair. Special goods are sold in cer-
tain quarters of the town, thus in the Persian quarter carpets, rugs, shawls
and silks are sold; in another tea; another, skins and furs, and in another
metallic wares. The sales foot up annually about twenty million pounds
sterling.
NORMAN CONQUEST. 85
spent their time in war and the chase. "Red deer and wild
swine were of higher value in the eyes of such men than the lives
of Saxon Serfs." Henry I, in 1110, endeavored to encourage
Norman homc manufacture by establishing a colony of
Conquest. 1066 Flemish weavers in London, and gave them many
Great Charter privileges, but displayed his characteristic igno-
rance by condemning all foreign wool to be burnt. Then came
the crusades, in which the zealous Richard I took a prominent
part, with the result that Eastern commodities now came more
freely into western Europe. Gold, spices and frankincense from
Arabia; precious stones from Egypt; purple cloth from India;
palm oil from Bagdad and weapons from south Russia and the
Baltic Sea were introduced into England, and trade began to
show evidences of steady growth. Then came the Great Charter,
wrested from the miserable King John, in which were clauses
favorable to commerce, guaranteeing merchants against exces-
sive taxation and establishing a uniform system of weights and
measures throughout the kingdom. During all this time En-
glish wool was the chief basis of wealth. The considerable
amount which the English exported shows its relative value to
other products, and at the same time indicates the insignificance
of their manufactures. Only the coarsest cloths were made at
home. Most of this wool went to the looms of Flanders, where a
superior quality of fabrics was made and supplied to England
English Wool ^^^ ^^^ P^^*^ °^ Europe. Thus England as a source
Banishment of supply for the raw product and Flanders as a
of Jews great manufacturing country were interdependent
commercially, and this tended to make them so politically, so
that when Edward I, in 1297, wished to attack France, he first
made sure of the friendship and support of Flanders, and later
sovereigns pursued the same policy. Edward I recognized the
value of commerce chiefly as a means of revenue, and for this
reason aimed to foster it by opening English ports to the mer-
chants of Germany, France, Portugal and Spain. As a further
86 HISTOKY OF COMMERCE.
measure for enriching his exhausted treasury and relieving
himself of enormous debts, while displaying his religious intol-
erance and bigotry, he confiscated the property of sixteen thou-
sand five hundred industrious Jews whom he banished from his
Kingdom.*
Edward III offered special privileges to the weavers and
dyers of Flanders who would settle in his realms, yet fettered
the grant with absurd regulations in order to prevent his invited
guests from becoming too rich. During his reign a citizen of
London is said to have been executed for using coal as fuel
contrary to law. The opposition to coal was based chiefly on
the fact that at that time chimneys were luxuries
1326^^377 ^^^ commonly enjoyed, and the smoke from the
fires had to escape by the cracks and crevices of the
houses. Glass windows were about as rare as chimneys at that
period.
Up to the fifteenth century England had depended almost
wholly upon foreign ships to carry away her exports and b^ing
her the products of the outside world. This carrying trade
was mostly in the hands of the merchants of the Italian cities
(Genoa and Venice) and the Hansa towns, whose fleets, consisting
of many vessels, laden with wool, cotton, silks, velvets and
spices, were eagerly looked for along the English coast. But as
the English learned the advantages of manufacturing from
Flanders, so they learned the art of navigation from these for-
Deveiopment ^^§^ merchantmen, and gradually began to embark
of the Carrying in the busiucss of forcigu commerce. This was
vigorously opposed by the Hansa towns, who
wished to have no participators in the profits of a lucrative mo-
noply, and conflicts at sea were frequent and exceedingly har-
*This banishment occurred Nov. 1, 1290. Edward's excuse for the decree
was that the Jews were clippers of the coin of the realm, but his real
reason was to confiscate their property. Their banishment was a severe
blow to the industrial welfare of the Kingdom. Jews were not permitted
to return or re-enter England again until the time of Cromwell.
CAKKYING TRADE.
87
assing. But in the course of time English ships became more
numerous and went farther abroad, until the Hansa found that
English commerce could not be stifled, and the visits of Italian
ships became less frequent and profitable, until they finally-
ceased in 1587. Thus about the time the New World was
discovered England was expanding in its commerce and manu-
factures, and preparing to take its place along with Spain,
Portugal and the Netherlands, as one of the leading nations. It
was far behind these, however, in point of discoveries in the
Western Hemisphere, but was destined at a later period to far
surpass them in colonial possessions. Under Henry VII English
commerce was placed upon a firm and permanent footing.
Recognizing the necessity for a naval power to protect his
merchant shipping, he built a fleet of war ships, called the
English Com- Great Harry, which was the beginning of that
ush^d under" ^^^J which defeated the Invincible Armada in
Henry VII the Tcigu of Quccu Elizabeth, and has given En-
gland its supremacy on the ocean even to the present time. As
soon as England was able to protect her merchant ships, piracy
declined, her flag became respected and her commerce increased.
Henry VII, after the discovery of the New World, empowered
the Cabots to undertake voyages of discovery, and it is under the
right of discoveries made by these men that England claims, at
the present time, a large part of British North America.
Henry VIII abolished the monasteries and set up the Church
of England. Up to that time the church owned and controlled
about one-fifth of all the valuable land in the realm, and upon
the dissolution of the monasteries these lands were divided and
distributed, thereby greatly improving and encour-
M^as°e°ies*^* ^o^^g agriculturc, and this in turn tended to im-
prove manufactures. Sheep were bred in large
numbers and more wool was produced. As the natural resources
of the country were developed and utilized, the means of ex-
change were improved and commerce extended. Indian spices,
88 HISTORY OF COMMERCE.
Turkish carpets, gums, drugs and ivory were sought in the
Mediterranean and Eastern ports. English ships went on voy-
ages requiring a year or more for their completion, and London,
Southampton and Bristol carried on trade with distant parts of
the world in English ships.
But it was Elizabeth, the daughter and successor of Henry
VIII, who promoted British commerce most effectually. This
remarkable woman was ambitious that England should rival
Spain as the leading power of the world, and to this end she
legislated often arbitrarily, and frequently for the moment and
not for time, but yet with the single purpose always in view of
building up England's power and resources. During her reign
agriculture and the mechanic arts underwent great improve-
ments, and crops were at times so abundant that wheat was
Qyggjj exported. Hemp and flax were successfully cul-
Elizabeth tivatcd. Manufactures greatly improved, and the
1558-1603 weaving of woolen cloth received a fresh impetus
by the arrival of a large colony of weavers from the Netherlands
who had been driven out by the religious persecutions of Philip
II of Spain. When the Invincible Armada attacked the English
navy about three hundred and fifty merchant ships were pressed
into service for the defense of England, and after the contest
was over many of the Spanish prizes served to swell the growing
English navy. Ship-building greatly developed, and the number,
size and quality of the vessels built underwent a remarkable
change.
Elizabeth deprived foreign merchants of their privileges,
closed the London agency of the Hansa, and finally went to the
extreme length of forbidding foreign vessels to enter English
harbors. She granted numerous monopolies to
PoUcy^*^^ encourage home enterprise, and thus between the
restrictions against foreign ships, and monopolies
at home, the people were debarred the enjoyment of many useful
commodities made abroad and compelled to pay dearly for worse
ELIZABETH'S POLICY. 89
articles made at home. Monopolies became so oppres-
sive, and prices of iron, lead, coal, saltpeter, oil, vinegar,
starch, yarn, skins, leather and glass were so exorbitant, that
her subjects finally protested against the system and openly de-
nounced the laws. The queen wisely yielded to the popular
demand, thanked the House of Commons for calling her atten-
tion to the wrong, and changed her policy.
During Elizabeth's reign trade and manufactures prospered
beyond all former periods in English history. The comforts of
life were multiplied and the style of living among all classes
greatly improved. Prior to that time the common people lived
in houses with dirt floors, no pretense being made to sanitation,
and the streets were so filthy that London and many other
towns were annually visited during the summer months by an
epidemic called the "Plague." But before the end of Elizabeth's
reign much of this was changed. Houses began to be built with a
view to health and comfort. Tasteful furniture came into use,
displacing the rude arrangements of former times.
Prosperity ^^^ Wealth asserted its presence among the com-
mercial classes as well as among royalty and nobili-
ty. The queen's example encouraged a taste for magnificence in
apparel. Luxury at table likewise prevailed, and sumptuous
habits spread from London to every province of the realm. The
Royal Exchange, the most notable commercial emporium in En-
gland, was founded at this time and opened by the queen in per-
son. The famous East India Company was chartered by Eliza-
beth in 1600, and thus was laid the foundation of the vast En-
glish empire in India which reached its fruition in the reign of
Victoria. This, too, was the Golden Age of literature, and gave
to the world Shakespeare, Bacon, Spenser, Ben Jonson, and a
host of others who have enriched the world with productions of
inestimable value.
The East India Company chartered by Elizabeth in 1600
was the beginning of the system of foreign commerce and colo-
90 HISTORY OF COMMERCE.
nization which has grown to such immense proportions, and made
England the great manufacturing and distributing center which
she is to-day. This was fashioned after the Dutch
Qomi&ay ^^^^ India Company formed about the same time,
and was given the exclusive right of com-
merce with all the countries extending from the Cape of Good
Hope eastward to the Straits of Magellan, "except such coasts
and islands as might already be occupied by some friendly
European state." The government of the company was vested
in a governor and board of directors, varying in number at
different times and under different statutes. Besides these,
local councils, having limited authority over particular terri-
tories, were established in Madras, Bombay and Calcutta. The
original purpose of the Company was the profits of commerce,
but in the exercise of its functions it gradually assumed a gov-
ernmental character. It began as a purely private corporation
of trading merchants, free from governmental direction, but
eventually was brought under a "Board of Control" appointed
for India, and subjected to home supervision.
This company met with wonderful success from the first,
realizing profits from its voyages and the sale of the products
of India of fabulous amounts. The Portuguese and Dutch, who
had previously become thoroughly established in the trade,
opposed by every possible means the encroach-
company^***^ mcuts of the English merchants upon Indian ter-
ritory, but by winning the favor of the Great
Mogul with bribes and presents, taking advantage of the quar-
rels among the petty chiefs and siding with the one most likely
to be successful, the company in time gained a firm footing
and established agencies and trading posts in various vantage
points of the empire. The wealth of India was now poured
into the lap of Britain by ship loads. The profits of the com-
pany became enormous. Shares of £100 rose in the market to
£245, £300 and even £500. Luxurious tastes were created by
EAST INDIA COMPANY. 91
the introduction of rare commodities. Spices and jewels from
India were extensively used, and rare cotton and linen fabrics
added to the wearing apparel of the rich. As the use of gun-
powder in war increased, there arose an increased demand for
nitre which Europe could not satisfy, but the supplies from
India were abundant enough to meet all needs, and the profits
were large.
The success of the East India Company and the enormous
profits which it was realizing from its royal monopoly excited
the jealousy of London merchants, with the result that a rival
company was formed which set at defiance the exclusive privi-
leges of the authorized company, and fitted out
with VivaVs''* ships for Indian trade. When caught these were
treated without mercy as pirates by the East India
Company. Nevertheless they continued to struggle for a share
of Indian commerce, and in 1698 disputed in Parliament the
renewal of the charter of the original company. The result was,
a combination of the two companies under the name of the
United East India Company, which for a century held despotic
sway over England's commerce in the East. During the first
half of the seventeenth century the East India Company re-
tained purely a commercial character, but being situated far from
the protection of the home government, beyond the watchful
supervision of consuls and ambassadors, it became necessary that
the company should be able to defend itself and redress its own
wrongs. Thus a military character was attached to trading, and
forts and garrisons were built.
Owing to the contests between the native princes after the
Great Mogul dynasty fell, the French in 1750 undertook to
Conflicts with destroy English power in India, and well nigh
the French succcedcd, too, but owiug to the valor of Lord
Final Result Q\{yQ^ formerly a clerk in the company's office at
Madras, the French were defeated, the native princes made vas-
sals, and a large part of Indian territory brought under English
92 HISTORY OF COMMERCE.
control. From that time until Napoleon there were more or less
of conflicts in India between the English and French, with
odds in favor of the former. In 1767 Parliament decided to
claim a share in the government of the territory thus acquired,
and appointed Warren Hastings first* governor-general. Under
his administration and those of his successors extensive ad-
ditions were made to English territory during the next fifty
years. Meanwhile the power and commercial supremacy of the
United East India Company declined. Its servants committed
the greatest extravagances and frequently returned home to
England with immense fortunes, while the company itself was
frequently in financial difficulties. In 1813 Indian trade was
by act of Parliament thrown open to private enterprise, and in
1833 the Company was compelled to abandon entirely its trading
character. Its functions continued politically until the Great
Mutiny of 1857 gave it the death blow. In 1858 Queen
Victoria, by proclamation to the native chiefs and princes, took
over the government of India, and in 1877 she formally assumed
the title of Empress of India.
CHAPTEE X.
COMMERCE OF ENGLAND— Continued.
MANUFACTURING; POSTAL SYSTEM; BANKING; SPECULATION;
COLONIAL POLICY.
From exporting her wool and importing her manufactures
as England had done during the Middle Ages, she had in the
seventeenth century risen to the position of a manufacturing
nation, sending large quantities of cloth, metals and eastern
products brought first to England, to her colonies and to the
lands along the Baltic and Mediterranean. Thus we see her
England as a importing the products of Turkey and India or
Na°orNav°! ^^6 fish of Ncw Fouudlaud and re-shipping them
gation Acts to Fraucc, Russia, Spain and Italy. Her trade in
woolens with the Netherlands continued in a prosperous con-
dition while her colonial trade developed rapidly. The carrying
trade was yet largely in the hands of the Dutch, and in order
to stimulate English ship-building so as to handle this trade
herself, and cripple the Dutch, Cromwell in 1651 had laws
enacted, called the Navigation Acts, by which vessels built in
England or a British colony alone could be employed in the
importation of goods into England from the three continents
of Asia, Africa and America, while European merchantmen could
introduce into British ports only the produce of the nations to
which they belonged. English ownership of vessels engaged
in foreign trade thus became a necessity, and the officers and at
least two-thirds the crew were required to be native born.
These laws continued in force until 1825 and no doubt gave
a great impetus to shipping, enabling England to gradually
obtain control of much of the carrying trade of the world, an
acquisition which she has continued to hold up to the present
time.
98
94 HISTORY OF COMMERCE.
Under Cromweirs wonderful energy affairs improved. War
ceased and prosperity for a time became more general than it
had been for two generations before. Agriculture continued to
improve and manufactures advanced. The manufacture of cotton
goods had its inception about this time. A cheap and efficient
postal service was established under government
Postl" syltem coutrol and security, thus greatly facilitating trade
and industry. Prior to this time many modes of
conveying letters had been in vogue, but Cromwell, by the Act
of 1656, organized a postal department of the government,
appointed a postmaster-general and established a system of
post-roads throughout the realm. Thereafter the occupation of
carrying the mails was forbidden to private individuals. One
object of the act was to discover and prevent wicked and danger-
ous designs against the government, by exercising a censorship
over the mails. Home and foreign commerce steadily advanced.
As manufacturing and ship building increased, foreign markets
were sought and found for English products. The commerce
of the Netherlands was now on the decline, partly owing to' the
persecutions of the Spanish king and partly as the effect of the
Navigation Acts. Germany, another competitor of England,
Progress ot ^^^^ Severely injured by the Thirty-years' war
English (1619-1648), and with these two competitors
Manufactures practically out of the race, English commerce went
forward with increasing vigor and facility. Immigration from
the Flemish manufacturing centers was encouraged, and thou-
sands of weavers and dyers came to England bringing their
skill and sober habits, as an addition to the wealth of the realm.
At about this time also, Louis XIV of France committed his
egregious mistake — which cost his country so much and bene-
fited England accordingly — of expelling the Huguenots or
French Protestants, by the revocation of the Edict of Nantes
(1685) and 50,000 of his most skillful artisans went over to
England, carrying with them an accumulated capital of not less
BANKING SYSTEM. 96
than £3,000,000. These gave a new impetus to the manufact-
uring interests of Britain, and greatly benefited, especially the
silk, glass, paper and hardware trades. From the teaching of
these exiles the quality of English manufactures showed a marked
improvement, and tissues of silk, wool and linen soon attained a
high degree of perfection. Irish linen from home grown flax
attained a world wide renown from this period.
It had been customary for London merchants to deposit
their funds with the mint for safe-keeping, but Charles I
seized their funds, as a forced loan, and thus not only destroyed
the government credit but, by the same act, put an end to the
custom. City goldsmiths of high repute were next entrusted
Origin of the ^^^^ Valuable deposits, and they paid the mer-
Banking chauts interest and issued a form of negotiable
ystem receipt, similar in effect to our bank notes. These
goldsmiths were money lenders and made advances to the gov-
ernment in times of need, taking as security mortgages on future
revenues. They advanced to Charles II the sum of £1,300,000,
at eight or ten per cent, interest, upon the security of the taxes.
Charles in 1672 refused to repay the loan, saying they must be
content with the interest, and this caused widespread panic and
financial disaster. William Paterson, a Scotchman, then came
forward and offered to provide the government with £12,000,000,
to be repaid by taxes on beer and other liquors. The outgrowth
of the whole matter was the establishment in 1694 of the Bank
of England, an institution which has been a powerful element
in the commercial progress and greatness of England, as well as
a balance-wheel to the world of finance. After the great bank
was established the business of banking became an avowed prac-
tice, and men who could inspire confidence by their character
and wealth became bankers and found the pursuit lucrative.
At about the time John Law was promoting his Mississippi
scheme of reckless speculation in France the English were
launching a similar wild project of the most visionary character,
96 HISTORY OF COMMERCE.
now known as the South Sea Bubble. By this scheme they pro-
posed to pay off the national debt and all grow rich at a stroke.
The shares of the East India Company were at a high premium
and the Bank of England promised wonders, why
Bubbir*'^*'* not all get rich in stocks? John Blount, director
of an insolvent company trading in the South Seas,
from which not a penny of a dividend had been collected in ten
years, persuaded an easy ministry that he could wipe out the
national debt if granted an exclusive charter to the rich gold
mines yet undiscovered in the lands of the South Seas and all
the teeming fisheries which might exist there. Parliament made
the grant, and the directors began selling stock. The premium
went higher and higher until it reached more than 1,000 per
cent. Eich and poor alike embarked their means in the confi-
dent assurance of making a fortune. Shrewd bankers accepted
the stock as collateral for loans which ordinarily they would not
have considered. Hundreds of visionary companies were formed
and worthless stocks were floated to the amount of over £500,-
000,000 — more than all the gold and silver in the world, and
exceeding several times the value of the landed property of
England. The bubble burst in 1720.* Bankers and goldsmiths
failed, dragging down thousands with them. Many opulent
families were brought to beggary and untold misery resulted
among the poor. Like every other scheme the object of which
is the making of something out of nothing, the South Sea Bubble
exploded and left widespread ruin. So clamorous were the peo-
ple for some satisfaction for their losses that Parliament was
obliged to interfere, and not only distribute the meager assets
of the company among its victims but punish the offenders.
Several of the directors were imprisoned, and all were fined
to an amount aggregating several million pounds.
While the events previously enumerated were transpiring at
♦The pin that pricked the bubble was the discovery that Sir John Blount
and other promoters of the scheme had quietly disposed of their stock.
COLONIAL POLICY. 97
home, England was developing a colonial empire of large pro-
portions in America. Had her statesmen pursued the same
liberal and enlightened policy towards her American Colonies at
that time which characterizes her present system of colonial
government, she might have continued to hold and
Colonial Policy coutrol her American possessions indefinitely, but
instead she proceeded upon the false theory that
her colonies were proper subjects to be governed and exploited
for the benefit of the mother country — a theory which has been
steadily pursued by Spain up to the present time, resulting in the
loss of almost all of her colonial possessions. All imports to
the colonies from any other country in Europe were forbidden
in order to give English manufacturers a monopoly of the Ameri-
can trade. Then in 1660 an act was passed prohibiting the
colonies from exporting certain enumerated articles to foreign
countries without being first brought to England and there
unladen and then re-shipped by English, merchants. The
enumerated articles were tobacco, sugar, corn, iron, molasses,
ginger, cotton, indigo, coffee, skins and lumber — just the com-
modities which the American and West Indian colonies produced
in most abundance.
The colonists were not only compelled to sell their surplus
products through English merchants and send them in English
vessels, but they were equally forced to buy all imported goods
from England. An act was passed in 1663 prohibiting any
article from being sent into the colonies except the same was
sent from an English port and in an English ship. Home manu-
factures among the colonies were discouraged and suppressed.
Woolen manufactures were forbidden in 1719 and iron in 1750.
Colonial hatters were not allowed to send hats from one colony
to another. Thus the colonists were hampered and forced to pay
unjust tribute to home ships and merchants. This unfair and
narrow-minded policy caused much discontent and irritation
among the Americans, and was openly and ably opposed by an
98 HISTORY OF COMMERCE.
element in Parliament headed by the great statesman William
Pitt, but without result. Finally the culmination came on the
celebrated occasion when the citizens of Boston emptied a ship-
load of East Indian tea into their harbor, and war was openly
declared and begun in 1775.
We have now reached a period in history celebrated for social,
political and industrial revolutions. During the last quarter of
the eighteenth century the human mind seems to have awakened
to a new development and realization of its possibilities. The
principles of republican government were enun-
Revoiutk)ns ciatcd by the American colonists in 1775, and their
war of independence fought to a successful issue
in 1783. The doctrine that the power of the state resided in the
people and not in the sovereign was the seed which, transplanted
to French soil, ripened into the great social and political revolu-
tion of France in 1789. In England during this period a mighty
though silent, industrial revolution was going on, occasioned by
the invention of improved machinery and the introduction of
steam power. Prior to this time nearly all of the manufacturing
in England, as well as other countries, had been done by hand
in the homes or little shops of the workmen, aided by their
families and apprentices. The methods were crude, tedious and
difficult, causing manufactured goods to be both imperfect and
expensive. A series of useful inventions following closely upon
each other changed all this, increased the power of production
in mining, manufacturing and agriculture a hundredfold or
more, and made England the richest nation in the world.
Henceforth by the use of labor-saving machinery men were
able to produce not only better wares and of more uniform
quality, but in far greater quantities in proportion
System^ ""^ to the labor employed, and hence much cheaper
in cost. But in order to utilize this machinery
it became necessary that workmen should congregate, and thus
the introduction of machinery brought about the factory sys-
FACTORY SYSTEM. 99
tern. Costly and intricate machines as well as buildings in which
to conduct the work were necessary. This required the amassing
of capital — a new feature of the industrial problem. At first
factories were located near streams where water power could be
obtained, but with the advent of the steam engine they could be
located near towns where there was an abundant labor supply,
and as the means of transportation improved, less regard need
be had for the location of the raw product. The introduction
of the factory system marked an era in the industrial progress
of England and the world, and the bringing of workmen together
and into more intimate association with each other had a radical
influence upon them intellectually.
Chief among the inventions which brought about this indus-
trial revolution was the steam engine of James Watt, who took
out his patent in 1769. This was preceded in 1767 by the spin-
ning jenny invented by James Hargreaves, whereby many threads
could be spun at once instead of a single thread as heretofore,
and this to be followed later with improvements in the methods
of spinning and weaving wool and cotton by Arkwright, Cromp-
ton, Cartwright and others. These inventions completely revo-
lutionized the manufacture of cotton and woolen goods, and
these industries went forward with a bound. Manchester at-
tained great importance on account of the magnitude of its
factories. Liverpool, hitherto a straggling fishing town, became
a leading city, importing large quantities of raw cotton and ex-
porting the finished goods. Silk manufacture was similarly
promoted. The construction of machinery necessitated the use
of coal and gave a new impetus to mining, while
Inventions *^® ^^^® ^^ ^^^ stcam engine enabled the miners to
pump the water out of the mines — a thing which
they had not been able to do by means of the crude hand pumps
formerly used. Processes of smelting and developing ore, and
the manufacture of steel were greatly improved. Birmingham
and Sheffield date their vast hardware and cutlery trade from
100 HISTORY OP COMMERCE.
the invention of the puddling furnace by Cort in 1783, whereby
wrought iron was produced by the use of the coal found in close
proximity to both the ore and the limestone which is used as a
flux. By means of this invention immense quantities of ore were
utilized which would otherwise have been worthless.
Following closely upon the inventions enumerated above
came the Napoleonic wars, which engaged the most of the con-
tinent and threw a large share of European commerce into
English hands. At a prodigious cost immense armies were
Commerce kept in the field against France, and to supply the
N^apofeonic wauts of thcsc required the employment of an in-
Wars dustrial army at home. England had the advan-
tage that, while being a participator in the war, her fields and
cities were not devastated nor her territory invaded by the
armies. Prices were high and English goods in great demand.
Thus the period of war was a commercial advantage to England.
Meanwhile the development of the industries resulted in a
great improvement in the means of transit and commerce through-
out Britain. Goods manufactured must be sold and transported,
and better means of carrying were needed. Paths for pack-
horses were converted into wagon and cart roads, canals were
built, rivers cleared and utilized, and the way thus paved for the
introduction of steam power to locomotion a little later.
After the fall of Napoleon and the restoration of peace
throughout Europe in 1815, there came a period of reaction and
commercial depression in England which lasted ten years. This
was caused chiefly by the efforts of continental nations to revive
their own shattered industries by means of severe protective
tariffs, which practically shut out English manufactures. A
After the scrics of bad harvests coming about the same time,
^poeonic together with the high taxes incident to the war,
1815 to 1825 placed the country in a severe strait. The distress
was aggravated by the so-called "Corn Laws," which were en-
acted as a means of relief to the farmers, and provided that no
COLONIAL POSSESSIONS. 101
corn should be imported unless the price was 80s a quarter.*
The result was expensive bread for the working classes, and the
many substitutes resorted to for bread raised the price of other
foods. Riots and public meetings were held among the mining
and manufacturing districts throughout the whole of England.
The period of greatest distress was from 1817 to 1819, and
during that time the strong arm of the government was neces-
sary to maintain peace and order. In 1819 came a severe
financial panic, and in the single year no less than 3,552 bank-
ruptcies occurred in England alone. Gradually an improvement
came. The Bank of England resumed specie payment in 1821.
Injurious laws and restrictions were modified, business with the
colonies increased and commerce revived.
During this period of war and commercial depression at
home England was growing rich in colonial possessions abroad.
She not only defeated the French in India as previously stated,
and extended her holdings in that direction, but acquired Ma-
lacca, Ceylon (1796) and the Cape of Good Hope (1806), besides
Australia and many minor dependencies. Captain Cook had
discovered New Zealand in 1769, and by his advice in 1788 a
shipload of convicts were sent out and Sidney was founded as a
Growth of penal colony. A few sheep were carried thither in
Colonial 1797, and the fine pastures proved wonderfully
ossessions adapted to their rearing. The wool was of such
excellent quality that this, together with gold, subsequently
made Australia one of England's richest and most important
colonies.
The period of 1825 to 1850 may be said to mark the tran-
sition stage from protection to free trade in England's com-
mercial policy. Prior to this time more or less severe restric-
tions had been placed upon manufacturing, agriculture and com-
merce. Numerous monopolies had been granted, as in the case
*A quarter equals 8.252 bushels in our measure and 80s per quarter
would be equivalent to about $2.36 per bushel.
102 HISTORY OF COMMERCE.
of the Hudson Bay and East India Companies. The Navigation
Acts passed in 1651 continued in force, and every commodity,
raw and manufactured, was fettered with customs or excise
duties. A radical change in England's policy, requiring twenty-
five years for its consummation, was now to take place. In
The Change 1820 a Company of London merchants sent up a
tiorto^Frl?" petition to Parliament, praying that all duties ex-
Trade cept for purposes of revenue might at once he
repealed. A similar petition came from the Chamber of Com-
merce of Edinburgh. Parliament appointed a committee to in-
vestigate the question, and the report of the committee was
unanimously in favor of granting the relief asked. The Naviga-
tion Acts were at once modified and their severity relaxed. The
duties on raw silk and wool were reduced despite the opposition
of the wool growers. A Eeciprocity Bill was introduced by
Mr. Huskisson, President of the London Board of Trade, and
passed by Parliament, giving foreign ships equal advantages in
England to those accorded English ships trading in for^eign
ports. For a period of nearly twenty-five years the pendulum
of public sentiment was swinging in the direction of free trade,
but it was not until 1849 that the Navigation Acts were entirely
repealed, the Corn Laws abolished, and England had committed
herself unreservedly to the policy of free trade.
Meanwhile the mighty impulse given to the iron trade and
the application of steam to transportation by land and water
were developing commerce and the industries to a still greater
degree. Fulton had demonstrated the use of steam for the pro-
pulsion of ships in 1807, and in 1838 the first steamship. The
Great Western, crossed the Atlantic. The voyage to America
Application which had hitherto required five or six weeks was
of steam to now Suddenly reduced to a little more than a
Transportation ^^^^^ rpj^^ British fleet of merchant vessels in-
creased to twelve or fourteen times its size of thirty years be-
fore, and under free trade, England became the focus for shipsi
STEAM POWER. 108
of other nations bearing the products of nature and art from
every clime, and returning, radiated from the same ports
freighted with English manufactures for world-wide use. The
invention of the telegraph in 1846 was another great step in
advance, and with the penny post the means of communication
became so improved that supply and demand were regulated,
extensive fluctuations in prices avoided, and a steady and healthy
commerce promoted. The discovery of gold in Australia in 1851
led to extensive emigation to that colony, vastly increasing
the colonial trade of England. Within ten years gold was
sent to the mother country to the amount of £100,000,000.
This influx of the precious metal by cheapening money raised
prices of commodities generally, and thus stimulated production.
The opening of the Suez Canal in 1869 afforded a shorter and
quicker route to the East, and led to an extension of commerce
with India, China, Australia and the East Indies.
Poslelsions "^^^ culture of cotton was introduced into Aus-
tralia, and given a great impetus in 1861-1865 by
the scarcity of the American fiber, occasioned by the war of the
Rebellion which blockaded American ports, and soon Australian
cotton rivaled in quality the celebrated "Sea Island" growth.
Besides copper, tin, iron, wine and wheat, wool also came from
Australia in large quantities. From India and Ceylon came
cotton, indigo, jute, rice, wheat, horns, hides, tea and coffee.
Thus England's eastern possessions continued to expand, while
roads, canals, railroads and telegraph lines were constructed
throughout those colonies.
The English acquired the Cape of Good Hope (called Cape
Colony) from the Dutch in 1806. North of this colony were the
independent states of the Transvaal Eepublic and the Orange
Free State, still occupied by Dutch Boers. These settlers, who
kept up a close intercourse with Holland, were engaged prin-
cipally in the rearing of sheep and the production of wool,
which latter was their chief export. Natal, a newer British de-
104 HISTORY OF COMMERCE.
pendency than Cape Colony, was of growing importance and
produced arrowroot and sugar in considerable quantities. En-
gland exported to her South African possessions
South Africa apparel, furniture, cloths, iron, hardware, leather
and machinery, and in turn received from them
diamonds, gold, ivory, feathers and wool. The extensive dia-
mond fields proved a great attraction, as the supply of the
precious stones was said to be inexhaustible, and the Boers were
gradually pressed back. In order to secure more Boer terri-
tory, a mock contest was gotten up between a native chief and
the Boers, and by misrepresentation to the Boers a British
referee was actually appointed to decide the dispute. The decis-
ion was adverse to the Boers and the territory was immediately
ceded to the English. Friction between the English and Dutch
continued, until finally in 1899 open warfare was begun, result-
ing in a conflict lasting nearly three years. At fearful cost of
men and supplies, England subdued her antagonist and annexed
the territory of the Boer republics to the British Crown, the one
under the name of the Transvaal Colony and the other as the
Orange Eiver Colony.
The heavy draft upon the English treasury occasioned by
the South African war; the decline in the shipping interests of
the United Kingdom and the sale of several large steamship
lines to American capitalists; the severe decline in the acreage
of wheat in the United Kingdom (from 3,750,000 acres in 1872
to 2,000,000 in 1902), with similar decline in the acreage of
com, together with the fact that Germany, France and the
England's United States have entered the field of manu-
Commerciai facturc as scvcrc Competitors of England, and have
Condition even sccured important English contracts in steel
construction, have given rise to serious doubts whether the United
Kingdom will continue to lead the commerce of the world. The
overwhelming balance of trade between England and the United
States is now against England, and if this should continue for
RECENT COMMERCE. 105
a series of years, America, instead of being a debtor, would then
become a creditor nation, our dividends and interest would re-
main at home instead of going to England, and the financial
center of the world, now in London, would again move to the
westward.
CHAPTER XI.
COMMERCE OF THE UNITED STATES.
COLONIAL PERIOD; FINANCIAL POLICY; WAR OP 1812.
By the treaty of Paris in 1783, the American Colonies secured
their independence and became the owners of a domain embrac-
ing 1,400 miles of sea coast and consisting of 827,844 square
miles of rich and productive land. The natural resources of
this vast domain embraced every species of raw product, animal,
vegetable and mineral, which might be needful in the growth
and upbuilding of a nation in the arts of agri-
the"c^ionfes"*^ culturc, manufacture and commerce. At that time
the great majority of the population lived on
farms, but three and one-third per cent, having their homes in
the towns and cities, and there were but six cities having a
population of over 8,000. Naturally the energies of the people
were devoted to the utilization of the natural products of the
soil and forests. Shipbuilding early became an important in-
dustry, owing to the abundance of excellent timber along the
coast and rivers, and this led to the development of the fishing
industry. New England ships were made in great numbers,
and were largely engaged in whaling and in the cod fisheries
of that coast. Dried codfish was used as money in the Massa-
chusetts Colony at one time, and was one of the chief sources
of wealth of that colony. Whatever of foreign commerce ex-
isted was carried on chiefly with the mother country. The
northern colonies exported timber in the form of shingles and
ship timber; and the southern colonies, tobacco, tar, turpentine,
rice and cotton.
Several of the colonies made early attempts at the manufact-
ure of woolen, linen and cotton goods for home consumption,
106
UNDER THE CONFEDERATION. 107
but England regarded all such displays of colonial enterprise
with a jealous eye. She wanted no rival manufactories in her
colonies. It had been the uniform policy of Spain and Portugal
to use their colonies for their sole benefit, and England fell
into the same error. The English idea was that the colonies
should produce only what England needed, should sell to
England only, and in return buy what England had to sell.
Accordingly, when the Americans began to make woolen goods
to the extent of diminishing the demand for English woolens,
Prohibition of they wcrc promptly forbidden to export wool or
M°Jnufactures woolcu goods from ouc colouy to another. When
1650 they turned their attention to the production of
hats they met a like prohibition against the exportation of hats
from colony to colony, and the number of hatter apprentices
was limited by law. When they made an attempt to smelt a
small quantity of iron ore, for their daily needs, a statute was
passed which permitted the importation of pig iron into En-
gland duty free, but forbade the erection of "any mill for slitting
or rolling iron, or any planting forge to work with a tilt-hammer,
or any furnace for making steel." During the decade of 1760
to 1770, wonderful improvements were made by Hargreaves
and Arkwright in machinery for spinning and weaving, and the
colonists made great efforts to secure some of these machines, but
the legislation of England prohibited the exportation of ma-
chines, tools, plans, and even the immigration of any one who
knew how the machines were made. By these means, together
with the navigation laws forbidding trade with England, includ-
ing English Colonies, except in English ships, she made it ex-
ceedingly difficult for the colonists to supply themselves with
even the coarsest articles of everyday use.
The strained relations between the colonists and the mother
country became more aggravated, and the tie which had bound
them together for a hundred and fifty years was broken by open
hostilities in 1775. The American Eevolution was carried
108 HISTORY OF COMMERCE.
through to a successful issue, but peace did not bring prosperity, ^i^
The war had shattered business, sapped the brawn of the country.
The Colonies ^^^ thrown the states heavily into debt. The
under the confederation proved weak and ineffectual. It had
one eration ^^ power to enforce its determinations, carry out
its agreements or redress its injuries. In the treaty of Paris it
was promised that Congress should "use its influence" to secure
the payment of private debts due to Englishmen. But it turned
out that Congress had no influence and the debts were never
paid. In consequence the British refused to give up some of
the military posts on the western frontier. American ships
were captured or plundered by the Barbary pirates with im-
punity, the new republic being powerless to fight them. *
In order to prosecute the war of the revolution, Congress
issued bills of credit, which were to pass as money. This con-
tinental currency at first was taken readily, but as million
after million was printed and the credit of the Congress ap-
peared more and more doubtful, its value declined, and at last
it grew so cheap that "not worth a continental" became a by-
word to express utter worthlessness. During the summer of
1780 the currency became so depreciated that it required ten
dollars of the paper to make one cent. Prices rose until corn
sold in Boston at $150 per bushel and flour $1,575 per barrel.
Samuel Adams is said to have paid $2,000 in paper
Mcmey*"**^ money for a suit of clothes, and Washington to
have remarked that it required a wagon load of
money to buy a wagon load of provisions. The people of Rhode
Island thought they had hit upon a solution of the trouble, and
issued a legal tender paper currency. Any farmer could borrow
this from the public treasury upon security of one-half the
appraised value of his land. Nevertheless the currency de-
preciated, and all their efforts to keep it at par proved futile.
In Massachusetts riots broke out in opposition to the efforts of
creditors to collect their debts, and discontent and lawlessness
were rife.
UNITED STATES BANK. 109
To add to the unfortunate situation the states became in-
volved in quarrels with each other. Having the right to levy
duties on imports, they set out to compete with each other for
foreign commerce — the one building up its trade at the expense
of another. They went a step farther and laid taxes on goods
imported from neighboring states. New York laid a duty on
Quarrels imports from New Jersey and Connecticut. New
between the Jcrscy retaliated by taxing the New York light-
^***^^ house on Sandy Hook. New Hampshire quarreled
with New York over claims, and Pennsylvania and Connecticut
wrangled over land in the Wyoming valley. The whole state of
affairs demonstrated the imbecility of the government, and the
country was steadily drifting into hopeless bankruptcy and
anarchy, when in 1787 a convention met in Philadelphia to
form our present constitution, which went into effect March 4,
1789.
With the organization of stable government came a revival
in business. Commerce and manufactures began to thrive and
expand as soon as men could begin to depend on the future.
General distrust and uncertainty gave place to confidence and
faith in the future of the new republic. Trade between the
states was no longer hampered by troublesome tariffs, and
bickerings ceased. The federal government was able to collect
its revenues and its obligations were promptly met.
Constitution* Hamilton as Secretary of the Treasury formulated
a financial system which bred confidence and cre-
ated a national credit. Capital began to move in the develop-
ment of the resources of the country, manufactures began to
expand, and commerce redoubled its activity. The federal gov-
ernment assumed the debts of the states, and the holders of
continental script suddenly awoke to find that the paper which
they had considered of doubtful value was genuine wealth.
Hamilton recommended the establishment of a bank of
the United States, with branches in the principal cities. The
no HISTORY OF COMMERCE.
capital of the bank was to be $10,000,000, and the federal gov- ^
ernment was to own one-fifth of the stock and appoint one-fifth
of the directors. The bank was to be a depository of government
money, issue paper currency payable in gold or silver and receiv-
able for all dues to the United States, and transact a general
banking business. The proposition aroused the fierce objections
of those who feared the results of associating government with
banking, and the objection was at once set up that
sute^Ba^nk ^^® Constitution gave Congress no specific au-
thority to organize a bank. Hamilton then laid
down the doctrine of "implied powers," claiming that Congress
could by implication do anything "necessary and proper" to
carry into effect its express powers, and that a bank was such an
agency for the conduct of the finances of the government. This
was the beginning of the "loose construction" and "strict con-
struction" theories held by the opposite political parties to the
present time. The bank bill was passed and President Washing-
ton signed it, creating the United States Bank with a^charter for
twenty years — 1791-1811. The bank served as a balance-wheel
to our financial system, and as a manufactory of credit, by giving
stability and definiteness to the currency, and enabling the
people to economize the use of capital. Branches were estab-
lished in New York, Boston and six other cities, the parent
bank being at Philadelphia. Secretary Gallatin strongly recom-
mended the renewal of its charter in 1811, but after a vigorous
debate on the question Congress voted it down.
Hamilton's next important measure was the establishment of
a national mint. The coins in use throughout the states were a
mixture of English, French and Spanish, gold, silver and cop-
per of various denominations, weights and values. The English
system of pounds, shillings and pence had been the standard
money of the country. To Thomas Jefferson is due the credit for
the adoption of a uniform decimal scale, with the dollar as the
unit. Jefferson's mint bill followed closely after this reform,
FOREIGN TRADE. Ill
and reduced the metal currency of the country to a uniform
system of coins. The double standard of gold and silver was
adopted, with a ratio of fifteen ounces of silver to one of gold.
Establishment '^^^ latter being then the dearer metal at that ratio,
of a National the chcapcr, silver, drove it out of circulation, and
silver and paper were the only mediums of circu-
lation. With the decimal system of coinage and a national
mintage, the facilities for the computation of values and trans-
action of business were greatly improved.
At the time of the adoption of the Constitution the exports
of all kinds of the new republic amounted to about $20,000,000
annually. Of this amount a very small portion, probably not
more than $1,000,000, was manufactured goods, for it must be
remembered that before the war England* had thrown almost
insurmountable hindrances in the way of the manufacturing
industries of the colonies. Owing to the scarcity of skilled labor,
and its consequent high price, together with the low prices pre-
vailing, the manufactures of the country picked up slowly for
the first few years after the close of the war, but by
Tonnage Acts ^'^^^ ^^^J began to expand with great rapidity.
In that year Congress passed a tonnage act, which
taxed vessels built and owned by the United States six cents a
ton; those built but not owned in the United States thirty cents
a ton; and foreign ships fifty cents a ton. The tariff act which
was passed in the same year discriminated in favor of East
Indian goods imported direct, as against the same goods
imported from Europe. Stimulated by these provisions, exports
and imports rapidly increased, and the American flag went to
distant parts of the world. New England ships embarked with
cargoes for the far East or intermediate ports, to bring home
in return immense quantities of coffee, spices, tea, silk, nankeen
and other cloths, all of them articles of great value in com-
parison with their bulk, and hence yielding good profits to the
carrying trade. Portions of these cargoes which did not find a
113 HISTORY OF COMMERCE.
ready market at home were re-shipped to Hamburg and other
European ports. Thus American commerce rapidly expanded,
and shipbuilding became more active, so that while in 1789 less
than one-fourth of our ocean traffic was in American vessels, in
1792 less than one-fourth was in vessels not American.
An untoward combination of circumstances in Europe arising
about this time proved a great advantage to American com-
merce. The French Revolution was in progress and had moved
beyond control. Thrones were in danger. France had been
attacked by Germany in the interest of the "divine right of
kings.'' England became involved, and in 1793 declared war
upon France. The effect of this war was to further stimulate
American manufactures and shipping. Each of the belligerent
nations needed the provisions and stores which the Americans
Effect of the ^^^ stood ready to furnish. Under the colonial
Napoleonic systcms of England and France commerce with
^^^^ their colonies was confined to their own ships,
but the British navy swept French merchantmen from the seas
and visa versa, and hence the colony of Louisiana could render
France no help in the form of supplies. The French govern-
ment therefore threw open French ports to American vessels.
The sugar of the West Indies, the coffee and hides of South
America, and the provisions of America were thus caiiied se-
curely into France, thus greatly increasing our foreign com-
merce.
The Middle and Southern states had, as colonies, long been
raisers of cotton, but very little of this useful fiber had been
exported until after the adoption of the Constitution, owing
chiefly to the difficulty of separating the seed from the fiber.
This process has been accomplished by slow and
The Cotton Gin tcdious hand labor until 1794, when Eli Whitney
invented his cotton gin, one of the first and most
useful inventions of America. By means of this machine cot-
ton became a more thoroughly marketable article, and its pro-
{ VNIVERSITY j
LOUISIAX2K^^^a^6ML 113
duction was vastly stimulated. The development of cotton
raising in the south and its manufacture in the north began with
this invention, and continued to develop until it has become in
recent years one of the largest articles of export among our raw
products.
In the decade from 1790 to 1800 the population of the
republic increased from 4,000,000 to 5,000,000. Frenchmen
came from San Domingo and other West Indian Islands; Irish-
men from what they regarded as oppressions in Ireland; Scotch-
men, Englishmen and Germans came to enjoy the advantages of
popular government and escape the discontent, monarchial op-
pressions and wars of Europe. These foreigners were rapidly
assimilated, and went to work to acquire land and better their
condition. The tide of immigration which set in
Immigration thus early in the history of the republic continued
to flow hither during the century following. Not
being able to compete with the slave labor of the south, these
emigrants avoided that section, and settled along the east and
west lines, developing the great West and carrying their skill
and thrift to the borders of civilization.
The most important event in the early history of the repub-
lic was the Louisiana purchase, made during the administration
of President Jefferson, by which the United States acquired
title to all the land from the Mississippi to the Rocky Mountains
and from the Gulf of Mexico to British America. This vast
Purchase of domain had originally belonged to France, but in
Louisiana 1762 that nation transferred it to Spain. The
^ Mississippi River was the natural outlet to the
Ohio valley and the northwest, and since transportation over the
Alleghany Mountains was exceedins^ly difficult owing to the
lack of suitable roads, it became highly necessary that the west-
ern settlers should have the great waterway to the gulf kept
open. The Spanish officials at New Orleans were vexatious, and
hampered the commerce of the Americans with useless restric-
114 HISTORY OF COMMERCE.
tions. In 1800 the Territory of Louisiana was ceded again to
France, and President Jefferson soon after sent Mr. Monroe to
Paris as a special envoy to act in conjunction with our resident
minister, Mr. Livingston, and if possible purchase New Orleans.
Two million dollars were allowed for the purchase. Napoleon
was in need of funds to prosecute his war with England, and
knowing that he could not protect his colony while England
ruled the sea, proposed to sell the entire province of Louisiana
for $15,000,000.* The commission had no authority to make
the purchase at such a price, and it was impossible to communi-
cate with the government at Washington in time to carry through
the deal, so they assumed the authority, accepted the offer, and
trusted to the President and Congress to ratify their acts. This
purchase not only secured the desired outlet to the sea by water,
but doubled our national area and added immensely to the
wealth and resources of the nation.
In 1807 Fulton built his first steamboat on the Hudson
River, and demonstrated the use of steam in propelling ships.
This invention exercised a vast influence upon the future inland
commerce of the United States, and was a potent element in
developing the resources of the country. It was of the greatest
importance that our numerous waterways should be utilized as
channels of commerce, but this was impossible until the applica-
tion of steam power was invented. Prior to this event travel in
the interior was slow. By land the pioneer wagons were heavy
and the roads dreadful; by water the farmers near
steamboats the rivcrs floated their produce down to market in
flat boats, and poled them up again. Four months
were consumed in making the return journey from New
Orleans to St. Louis. The effect was that the farmer paid dearly
*The price was $11,250,000 payable in 15-year 6 per cent. United States
bonds, and the assumption by the United States of claims of American
citizens against France, amounting to $3,7.50,000. Napoleon agreed not to
negotiate the bonds at a price which would injure the credit of the United
States.
HOME INDUSTRIES. 115
for all articles which he bought, but received little for his prod-
uce. In 1811 Fulton put his first steamboat on the Ohio River
at Pittsburg, and the results were marvelous. By 1815 the time
from New Orleans to St. Louis was 25 days and in 1823 it was
reduced to 12 days. Freight rates were rapidly reduced and
prices of commodities consumed by the settlers correspondingly
fell; while on the other hand grain and provisions, being assured
a more accessible market, rose in price. Lines of packet steam-
ers were established on all the principal rivers, and developed as
rapidly as the growth of the carrying trade would justify, until
the river commerce of the country became very extensive and
handsome passenger boats were plying on our rivers. This
means of transportation proved of immense value in the develop-
ment of the country, and continued until the demand arose
for more rapid transportation, and the general era of railroad
building set in soon after the Civil War.
During the period just prior to the war of 1812 the prosperity
of the young nation was almost phenomenal. Its foreign com-
merce had grown to large proportions and the American flag
was to be found in all the seas and harbors of the world. Home
industries were equally prosperous. Raw produce was varied
and abundant. Motive power in the shape of rivers and torrents
was abundant, and steam power was just making its appearance.
Labor being scarce, labor-saving machines naturally suggested
themselves to an ingenious people. Sawmills multiplied wher-
ever timber afforded materials for house and ship building, and
Home Indus- strcams afforded it the means of transportation,
thevviror Agricultural implements were improved. Cotton
i8ia. began to be raised on an extensive scale and was
woven at home as well as exported raw. The products of the
loom could not for many years compete in quality with those
of England in fineness, but they were stronger and more durable,
and on these accounts were often preferred. Woolen and linen
manufactures, first begun on a small scale, were afterwards
116 HISTORY OF COMMERCE.
developed into considerable industries. Hemp and flax grew
abundantly and furnished the materials for sacking, cordage
and sailcloth. Leather became an important article of manu-
facture, and in some of the forest towns of New England, where
hemlock forests abound, extensive tanneries were established.
Iron and glass from small beginnings rose to be important indus-
tries, while paper making, one of the humble attempts of the
young republic, developed into such a flourishing branch of
manufacture as to become of immense extent and value. Fish-
eries were vigorously prosecuted and gave employment to a
large population, chief of which were the cod fisheries of New
Foundland, the mackerel and the whale fisheries. The latter
was carried on in the Arctic, Pacific and Southern Oceans;
whale-bone and whale oil, with seal oil and skins, being the
valuable products of these enterprises. In the year 1800 Ameri-
can ships amounting to 130,000 tons burden were engaged in
whaling.
During this period (1803-1812) France and England were en-
gaged in a gigantic struggle. All Europe was affected, and
nation after nation was dragged into the conflict. England
ruled the seas and Napoleon's armies were invincible on land.
America, under the wise policy of Washington, remained neutral,
and was reaping a rich harvest in her foreign commerce. Ameri-
can ships swarmed every sea. They were loaded with the prod-
ucts of every clime, sailed to the United States, broke the
Capture of ^oy^g^, Unloaded the cargo, immediately reloaded
American it again, and proceeded to France and Spain to dis-
^***^* pose of it. The English admiralty courts had held
in 1800 that while it was illegal for the ships of a neutral
to carry the products of a belligerent to or from that belligerent's
colony, yet where the goods were carried from a belligerent
colony to a neutral port, unloaded, and entered in the custom
house, they could then be sent in the same ship to a belligerent,
without violating international law. Under this decision En-
WAR OF 1812. 117
gland saw in 1805 that France was prospering and her colonies
furnishing her with produce the same as in time of peace, and
this under the sanction of an English court. The decision was
accordingly reversed, and it was held that a voyage from the
United States to a belligerent port with goods from a belligerent
colony was illegal. Under this decision American ships by
the score were captured by the British cruisers.
Parliament followed up the matter by passing in 1806 an
Order in Council declaring the whole coast of Europe under
blockade, and prohibiting any ship from trading in any of these
ports without a British license. In retaliation, Napoleon issued
the "Berlin Decree" declaring the coast of the British Isles in
a state of blockade. Thus American commerce was placed at the
mercy of both the French and English. As a result over 1,600
American ships were captured by France and England and their
cargoes, worth millions of dollars, condemned and confiscated.
President Jefferson struggled against these out-
WarofiSxa rages as best he could. The people were hot for
war, but Jefferson knew that the nation was in
no condition for war, and hence he tried "peaceable coercion."
Congress passed the "Embargo Act" in December, 1807, declar-
ing an embargo on all American shipping. Our ports were
sealed absolutely to foreign trade. Jefferson believed that the
loss of our products would bring England to terms. The
embargo ruined the commerce of the nation for the time being.
The price of wheat fell from $2 to 75 cents a bushel, and
general stagnation and business distress prevailed. Prior to
the embargo the British had claimed and exercised the right to
search American ships for British subjects, thousands of whom
were employed in the American merchant marine, owing to the
higher wages paid on American vessels. This right of search
was exceedingly obnoxious to the Americans. The Embargo
Act not having the desired effect on England, war was declared —
a war which cost the United States $150,000,000, besides the
118 HISTORY OF COMMERCE.
destruction of a profitable commerce, but it vindicated American
rights, taught the young republic the necessity for a navy, and
laid the foundation for reciprocity in international trade, a
principle which has since exercised an important influence on
the commerce of nations.
CHAPTER XII.
COMMERCE OF THE UNITED STATES— Continued.
REVIVAL OF MANUFACTURING; TARIFF LAWS; SLAVERY;
CIVIL WAR.
When the embargo, followed by war, withdrew the stimulus
from American husbandry by destroying the market for our
produce, and foreign commerce and ship-building were at a
standstill, the people's minds were thrown back upon the manu-
facturing industries of the country, and American ingenuity set
to work to improve and develop these. The tariff on imported
goods, chiefly English, was increased, improved machinery was
invented for working up raw products, especially in the cotton
industry of the south, inland communication was improved by
Commerce *^^ building of better roads and the construction
after the War and Operation of steamboats on the rivers. After
Panic of 1819 ^j^^ treaty of peace between England and the
United States, which was signed at Ghent, December 24, 1814,
and the defeat of Napoleon at Waterloo in the following spring,
peace reigned universal on land and sea. The United States
found itself able to compete with the monarchies of the old
world in the race for commerce. Its vessels went again to all
the harbors of Europe, and new avenues of trade were opened
up. The exports of cotton to England showed a remarkable in-
crease. In 1809 the number of bales exported was 14,000, in
1819 this export was 175,000 bales. Considerable quantities of
grain, rice and tobacco were also sent to Europe, while to the
West Indies we sent our staple, flour. Furs, hides and other
products were sent to India and China to be exchanged for tea,
some of which was exchanged again in Germany at a second
profit. The one serious drawback of the times was a defective
119
120 HISTORY OF COMMERCE.
financial system. Congress had refused to renew the Charter
of the United States Bank in 1811. The war had drained
off the specie, and the country was filled with depreciated paper
currency. A new bank was organized in 1817 to improve the
situation, but it was mismanaged and failed to bring about the
resumption of specie payments. Finally in 1819 there was a
panic and general financial collapse. Banks and business houses
failed and there was general distress. This panic was coincident
with the one in England.
In 1825 the Erie Canal, which furnished cheap transportation
to market for the products of Western New York and the terri-
tory tributary to the Great Lakes was completed. About the same
time the government built a military road from Baltimore,
through Wheeling and Cincinnati to St. Louis, and thus the
opening of routes of communication with the far west diverted
much of the produce of those territories from New Orleans to
New York. Agriculture improved, and the products of the soil
increased in quantity and variety. Saxony sheep of the best
breeds were imported for the improvement of the quality of
American wool. Flax and hemp, hitherto chiefly supplied from
Russia, were cultivated more extensively in order to supply the
demand for these fibers by eastern shipbuilders for caulking
ships, and also for the spinning and weaving of linen cloth.
The cotton industry continued to increase at a marvelous rate.
Home ^^^ price per pound fluctuating with a downward
Industries tendency, ■ but the gross value increased enor-
1 20-I 30 mously. Massachusetts, Rhode Island, New York
and Pennsylvania were the seats of the cotton industry, the
largest mills being located at Lowell. The South was an agri-
cultural section. Its slave labor was better suited to farming
than to factory work, and there was a scarcity of skilled labor
in the South. For these reasons the cotton mills were located
in the North, where skilled labor could be had, and they were
situated on the coast or on navigable rivers within easy reach of
HOME INDUSTRIES. 121
the sea coast, in order that the raw cotton could be advantage-
ously brought to the mills from the plantations of the South.
Mining was another industry which began to be developed
about this time (1815-1830). Rich as the country was in mineral
wealth, for want of capital little had been done prior to this time
to develop the mines of iron, coal, lead and the precious metals,
and even now they were worked in a most inadequate degree.
The introduction of steam as a motive power on steamboats
and for propelling machinery in the factories, quickened the
demand for coal, while the iron and steel industry began a
development which has since outgrown all others in the diversity
and importance of its finished product.
In order to maintain and encourage manufacturing enter-
prises, the United States early adopted the policy of protective
duties on imports — a policy which has been a cause of discord
between the North and the South. The Southern states were
very fertile and possessed the doubtful advantage of slave labor —
a class of labor suited best to agriculture. As a consequence
those states, restricted to agriculture, were opposed to protection,
while the Northern states, being devoted largely to manufacture,
sought the support of protection. The planters
and Slavery ^^^^ dcsirous of getting manufactured goods in
the cheapest markets in exchange for the produce
of their plantations. They were free traders, while the North
was in favor of free labor and opposed to slavery. Slavery and
trade protection thus became the bones of contention. The
first tariff law, passed in 1789, imposed a duty of about five per
cent. In 1812, to meet the demands of war, the rate of duty was
increased to about fifteen per cent. A new law was passed in
1816 imposing different rates of duty upon different classes of
products, but the average was about twenty-five per cent. In
1824 the manufacturers found it still difficult to maintain suc-
cessful competition against English products, and clamored for
further protection. The English had brought fresh skill and
122 HISTORY OF COMMERCE.
new inventions to bear upon their goods and were selling at very
small profits. Notwithstanding the vigorous opposition of the
planters of the South and consumers generally, Congress passed
a new tariff law, raising the duties to thirty-three and one-third
per cent. Again in 1828 the law was amended, increasing the
duties to an average of forty-five per cent. The South was
indignant, since it was not a sharer in the benefits of the tariff,
but on the contrary suffered in consequence. The cotton, rice
and tobacco x)f the South were shipped largely to Europe, and
in European markets these commodities brought no higher
prices on account of American tariffs, while the price of all
manufactured articles which the agricultural states might con-
sume was considerably increased. Carolina went so far as to
threaten secession, but trouble was averted, and in 1832 the law
was modified by taking off most of the merely revenue duties,
and reducing the protective duties. In 1833 Henry Clay's Com-
promise Tariff Bill was passed, by which a gradual reduction in
duties was provided for, down to a uniform level of twenty per
cent, by the year 1842. In that year, however, the manufact-
uring interests in Congress violated their pledge and reimposed
the old rates of duties. Thus the struggle over tariff and slavery
went on, the latter becoming more acute until merged in the
great Civil War of 1861.
The wise navigation laws of 1792 provided that only Ameri-
can built vessels should be employed in American commerce.
Following this was the enlightened foreign policy of neutrality
during the Napoleonic wars, by which our shipping was unmo-
lested, while that of other nations suffered. Then the "Tonnage
Laws" previously alluded to' helped to develop our merchant
marine. During the war of 1812 New York and Baltimore
ship-builders became famous for producing the swiftest fleet of
privateers called "clipper ships" that ever spread sail on the
ocean, scarcely one of the newly-built being captured by the
enemy. After the war of 1812 New York and Philadelphia
MERCHANT MARINE. 123
merchants established sailing packets to Liverpool and other
foreign ports. Stephen Girard was one of these merchants. From
1815 to 1850 may be called a period of reciprocity
Marine"' ^^ shipping. The law of 1815 equalized the ton-
nage and import duties on all ships and produce
of nations which were willing to extend the same privileges
to American ships and cargoes, and to all other nations we
offered the severe terms, that "no produce should be imported
into the United States except in vessels of the United States or
in the vessels of the citizens of the country of which the goods are
the growth, production or manufacture." This was an enact-
ment of the English Navigation Laws. Under these laws our
foreign commerce flourished and ship-building became a pros-
perous industry. Our coasting trade and fisheries have always
been kept exclusively to ourselves, and about 1830, owing to
increased production of cotton, rice and tobacco for export and
also for the factories of New England, our coasting trade de-
veloped extensively. Another great increase in the coasting trade
set in about 1846, owing to the settlement of California. Our
merchant marine reached its zenith of size and prosperity in
1857. Seventy per cent, of our foreign trade was then carried
in American vessels. About 1850 the period of steam and steel
began, and this proved a period of decadence for our merchant
marine. The construction of iron vessels returned to the British
Isles. The English could build these vessels cheaper than we,
and they have since possessed almost a monopoly of the industry,
although there are now indications of a decided change in this
respect. From seventy per cent, in 1857 the proportion of our
commerce carried in American vessels has steadily declined, until
in 1881 to 1885 it averaged barely twenty per cent., and in 1900
it was less than ten per cent. Seven-tenths of our total export
trade, and nearly two-thirds of our total foreign trade, both
export and import, is carried in British vessels. Let us hope
that this condition of affairs will not long continue.
124 HISTORY OF COMMERCE.
Congress in 1811 refused to renew the twenty year charter
of the United States Bank organized by Hamilton. During the
war which followed, the financial system was badly disarranged.
Specie payment had been suspended and the country was filled
with paper currency circulating at 15 to 30 per cent, below its
par value. To remedy this evil and resume specie payment, a
second United States Bank was organized in 1816 with a capital
of $35,000,000, power to establish branches, etc. The parent
bank was in Philadelphia, and twenty-five branches were estab-
The Second Hshcd throughout the country. President Jackson
United states was hostilc to the bank, as he believed it had been
opposed to his election. Accordingly in 1833, on
the pretext that the bank was unsafe, he ordered the Secretary
of the Treasury to remove the deposits of public funds and to
place them in state banks. This was almost a death-blow to the
Bank. It was obliged to call in its loans and reduce the volume
of its business almost to that of an ordinary bank.
During the decade 1825 to 1835, the country had been very
prosperous. The national debt had been steadily reduced since
the close of the war, and in 1835 the last dollar was paid. The
public lands were being sold in the west at a rapid rate, and
this brought a stream of money into the treasury. The receipts
of the government far surpassed its expenditures. Congress
declined to reduce the tariff for fear of injuring the manufactur-
ing interests of the country, and instead of using this surplus
revenue for internal improvements, which the strict construc-
tionists claimed would be unconstitutional, or for harbors and
fortifications along the coast, as urged by Senator
andSuTJius Bcutou, decided that the amount should be dis-
tributed among the states to be used by them in
public works as they chose. The surplus amounted on January
1, 1837, to $37,000,000. Three installments were paid, but be-
fore the fourth could be made ready, the great financial panic
struck the country and left the treasury bankrupt.
PANIC OF 1837. 125
The cause of the panic was attributed by the friends of the
United States Bank to the crippling of that concern, and by
the manufacturers to the reduction in the tariff, but while these
may have been factors, the most potent cause was, without doubt,
overspeculation. For ten years prior to the panic the country
had been upon a general wave of prosperity. Trade was active
and a general expansion in business was in progress. Merchan-
dise of all kinds was in demand at advancing prices. Cotton was
six cents a pound in 1830 and twenty cents in 1837. New busi-
ness enterprises were commenced and old ones enlarged. Buying
and selling of western land became a mania. Town sites were
laid out in the western prairies and lots were sold at inflated
prices. It is said that so many towns were laid out
The Panic of -^ HHnois that there was little land left for farms.
Banks were multiplied, and paper money printed
to meet the demand for capital with which to carry on the busi-
ness of the country, irrespective of the amount of specie back of
it all. The volume of paper money in circulation in 1837 ran
up to one hundred and forty-nine millions, while the specie sup-
porting it was less than forty millions. Speculators were buying
up public lands at one dollar per acre, and as soon as the gov-
ernment land agents deposited the cash in the banks, the specu-
lators borrowed it and bought more land. Thus the cash went
its rounds and property changed hands. Finally the government
issued its "specie circular," requiring that payment for public
lands be made in specie. This embarrassed the speculators and
began the feeling of distrust. Banks began to call in their loans,
and depositors began to withdraw their funds. Cotton fell from
twenty cents to eight cents, and other products proportionately.
English investors began to try to withdraw their capital, and
then suddenly the crash came. This was probably the worst
panic in point of severity the country has ever seen, although
the volume of business involved was far less that those of later
dates. "Cheap money/' rashness and overspeculation, and wild
126 HISTORY OF COMMERCE.
financiering by the treasury department of the government, were
the combined causes which led to this disastrous result.
The application of steam power to transportation brought
about an economic revolution throughout the world, but nowhere
was this more marked or beneficial than in the United States.
The canal boats and crude steamboats which came into use
during the two decades following the war of 1812, were super-
seded by the river packet and railroad train after 1830. By
means of improved facilities for transportation, the markets were
brought nearer to the farmer, so that his cotton, corn or cattle
were easily delivered and converted into cash, and in return he
was supplied with manufactured goods at far lower prices than
formerly, owing to lower carrying charges. Travel also began
to become something of a pleasure instead of a
Railroads scrious task, as it had been in the days of the
stage coach, and the movement of the people broke
down provincialism, improved the general intelligence and led
to the social and industrial upbuilding and advancement. In
1830 there were but 23 miles of railroad in the United States,
but by 1840 the mileage had increased to 2,775. In a journey of
two hundred or three hundred miles a passenger was liable to
be compelled to change cars several times, and the accommoda-
tions were far from luxurious, but they represented a step in the
onward march of civilization. In 1850 the mileage of the rail-
roads had increased to nearly 9,000 and in 1860 to nearly 30,000.
Another valuable invention, closely connected with the rail-
roads, came out about this time and added vastly to the facili-
ties of commerce, the telegraph invented by Morse in 1844.
Congress in that year made an appropriation of thirty thousand
dollars for the purpose of constructing a wire from Washington
to Baltimore, in order to practically test the invention. The
National Whig Convention was holding its session in Baltimore,
and over this wire came the news of the nomination of Henry
Clay for the Presidency, The construction of telegraph lines
TELEGRAPHS. 187
then proceeded with great rapidity, especially in the Eastern
states. In 1856 the various lines were combined under the cor-
porate name of the Western Union Telegraph
Telegraphs Company. The telegraph not only proved to be
a wonderful addition to the facilities for transact-
ing the business of the country, by affording quick communica-
tion, but also made the safe and rapid operation of the rail-
roads possible, thus accelerating the transportation of goods and
people. In 1858 the first telegraph cable was successfully laid
upon the bed of the ocean, and thus rapid communication be-
tween the old and the new worlds became possible.
In 1845 Texas was admitted into the Union, and thereby
was added 376,163 square miles to our broad acres, a large
part of which is rich prairie, well adapted to grazing or tillage.
The vast herds of cattle maintained upon these ranges have
furnished the country with a considerable portion of its supply
of meat and hides. A dispute with the Mexican government
over the boundary of Texas furnished a pretext for war with
that country, the real object of which was the acquisition of the
vast sunny land stretching from the Rocky Mountains away ta
the Pacific. The war was a series of victories for the United
States, and Mexico, poor, misgoverned and distracted by numer^
ous revolutions, was overpowered, and compelled to cede to the
United States the territory which we coveted. Americans can
never take pride in the story of this war, which
ce^sior*^*" had for its real object the conquest of a peaceable
though weaker neighbor's territory. The Mexi-
cans were forced to make what terms they could. They accepted
the Rio Grande as their border, and surrendered all land north
of it, embracing New Mexico and California, extending north-
ward to the border of Oregon. The United States assumed
the unpaid claims of American citizens, amounting to $2,500,-
000, and paid $15,000,000 for the territory. But like all ill-
gotten gains, this territory led to difficulty at once, and a severe
128 HISTORY OF COMMERCE.
dispute arose over the slavery question, which culminated a few
years later in civil war. In 1853 an additional tract of 44,064
square miles of land was purchased from Mexico, called the
Gadsden Purchase.
At the time of the Mexican Cession the presence of gold was
not known, but by accident the discovery was made in the follow-
ing year, and as soon as the news spread throughout the middle
and eastern states, a great rush set in for the Pacific coast, both
overland and by water via the Isthmus of Panama. The popula-
tion of California in 1847 was 15,000, and the output of gold is
estimated to have been about $890,000. This amount was in-
creased to $10,000,000 in 1848, to $40,000,000 in 1849, to $50,-
000,000 in 1850, to $55,000,000 in 1851 and to $65,000,000
in 1853, when the population had increased to over 100,000 of a
motley mixture of nearly all races and tongues, bent upon the
Discovery of ^^^ missiou, that of getting rich quickly. The
Gold in discovery of gold on the Pacific coast gave a new
impulse to the mining industries of the country,
and besides developed the trade of that portion of the country
very rapidly. The harbor of San Francisco was filled with
shipping, and thrifty towns and cities sprang up where only
straggling villages existed before.
Following the example of England in the erection of its great
crystal palace and exposition at Hyde Park, London, in 1851,
the first international exhibition in this country was held in
New York in 1853. It was fitting that this new and thriving
nation, then a little more than a half century old, should measure
its progress in the arts and sciences by a comparison with the
best the world produced. Never before had such a display
of the products of the hand and brain of man been attempted
in the Western Hemisphere. In the departments of machinery
and tools, agricultural implements, hardware, mineralogy and
mining, as well as the fine arts, America made a very extensive
and creditable display, rivaling in many respects the productions
EXPOSITION OF 1853. 129
of Europe. Not only our choicest products in almost infinite
variety were presented for exhibition, but from other countries
The Great and cHmcs, from distant parts of the globe, came
New^York'^ cxhlbits represented by countless contributors.
1853 England and France made superb offerings of
their works of art and manufacture, and the Sultan of Turkey
fitted out a steam frigate especially to convey the splendid fabrics
of the Ottoman empire, richly carved cabinets, rugs and carpets
of wonderful elaboration and beauty. This exposition did much
to stimulate the spirit of invention and discovery, and improve
processes of manufacture throughout the- country, and was the
beginning, the formal opening as it were, of what has proven
to be a half century of the greatest achievements in mechanic and
industrial arts the world has ever witnessed.
During the period of 1840 to 1855 there had been estab-
lished throughout the country a system of banking, under state
laws, called "free banking," by which banks were allowed to
issue circulating notes based upon little or no security, and
subject to very loose and inadequate restrictions. The chief
object in the scheme seemed, on the part of the banks, to be
to issue notes, get them into the hands of the people for value,
then take measures to prevent the note holders from calling on
state Banks ^^® banks for specie. Various subterfuges were
and the Panic rcsortcd to for this purposc. In one instance in
°^ ^^^^ Illinois, where an effort was made to present the
notes at the bank's counter for redemption, no counter was
found, but merely a hired room in a remote and obscure neigh-
borhood. This unreliable system of banking was permitted by
statutory enactments in sixteen states, and under it "mushroom
banks" were started in large numbers all over the west. Paper
money was plentiful and counterfeits floated in large quantities.
These conditions induced speculation of all descriptions. Cities
were laid out, railroads projected, and debts piled up at high
rates of interest, all based upon the prospects of large returns in
130 HISTORY OF COMMERCE.
the near future. A panic was inevitable, and in the autumn of
1857 it came, carrying down in the ruin thousands of reputable
firms, and entailing untold misery as usual upon innocent
widows and orphans. Nevertheless many of the banks which
had failed got on their feet again within the next three years, so
that when the war began, in 1861, there were 112 of these so-
called "solvent banks" doing business. This "wild cat" money
continued to circulate until it was driven out of existence in
1863 by the 10 per cent, tax imposed under the National Bank-
ing Act.
The period which we are just now considering — the decade
preceding the Civil War — was notable for the increased number
of its inventions and improvements in the processes of manufact-
ure. In 1857 there were issued 2,000 patents, 438 of which were
for agricultural implements and processes, consist-
iSso^-is'^'^^ ing chiefly of improvements in cotton gins, rice
cleaners, reapers, mowers and plows. The next
year there were issued 3,710 patents, of which 153 were for im-
provements in reaping and mowing machines, 42 for improve-
ments in cotton gins and presses, 164 for improvements in steam
engines, and 198 for improvements in railroads and railroad
ears. Some of these inventions have proven of the greatest
importance and economic value to mankind, such as those relat-
ing to the perfection of the sewing machine, printing presses, and
the improvements in the manufacture of rubber goods, carpets and
wall paper. Prior to this period ready-made clothing and boots
and shoes were practically unknown, these articles being made in
small shops, employing a few workingmen, but now with the
advent of machinery for cutting, sewing, etc., they began to
be turned out by factories at greatly reduced cost to the
consumer.
With the minds and energies of the people thus absorbedf
in their abounding material prosperity, new inventions and
improved processes constantly appearing to render human labor
CIVIL WAR. 181
more effective, and matter yielding to the brain and energy
of progressive man, we approach the great Civil War (1861-1865),
which marked the opening of a new era in the
civii°War Commercial as well as political history of our coun-
try. Prior to this time the North had been the
manufacturing section and the South was devoted almost exclu-
sively to agriculture. Owing to their diverse interests these two
sections had been in almost constant contention for the past
fifty years over the tariff question, but gradually there had
loomed up another and even more serious cause of disagreement,
the slavery question. The two conflicting systems of labor, free
in the North and slave in the South, would not mix. Emigration
would not put itself in competition with slave labor, and hence
passed in parallel lines westward across the North. Now came
the Civil War, which cost 600,000 lives and an incalculable
amount of property, and resulted in an industrial revolution of
the labor system of the South, forcing that section to adopt tha
system existing elsewhere, and therefrom dates the mechanical
development of the South.
CHAPTEK XIII.
COMMERCE OF THE UNITED STATES— Continued.
GROWTH OF INDUSTRIES; INVENTIONS AND DISCOVERIES;
FOREIGN TRADE.
The Southern states were the scene of the conflict, and re-
sounded with the tread of armies. As a consequence, the pros-
perity of the South was arrested during the war and its fields
and towns destroyed or damaged. The North held the mechani-
cal industries of the country, and under the stimulus of war these
industries were expanded to their fullest capacity. Business of
all kinds in the North prospered, prices were high, and the armies
in the field were sustained and paid by a thrifty agricultural and
manufacturing domain behind them. The agricultural South
could not compete with the manufacturing North.
After the War Prior to the war, the diversified resources of the
South were not appreciated — scarcely noticed.
Her rich deposits of iron and other ores, the coal to work the
ores, her timber and stone and her water power were almost
untouched. It was actually contended that manufacturing could
not be profitably carried on in the South on account of climatic
influences. But the war not only revolutionized the system of
labor in the South, but thereafter began the mechanical develop-
ment of the Southern states. With the return of peace, attention
was turned to the elements which are essential to industrial
development, and there has since grown up in that section an
extensive factory system. The South found that besides the
capacity to raise cotton and tobacco for domestic and foreign
consumption, great sources of wealth were hidden beneath the
surface in the mineral deposits of the country. Thus near
Birmingham, Alabama, rich iron mines were discovered, with
133
COTTON INDUSTRY. 133
coke-making coal and limestone needed for smelting and mak-
ing steel near by, and thus the cost of making did not involve
the transportation of either of these products. As a result,
Birmingham has now become an important manufacturing
center.
For a time directly after the war, and as its natural conse-
quence, agriculture and all other industries in the South were
depressed, and society was more or less discouraged, disorganized
and in a state of doubt. Fears were entertained that their great
staple, cotton, would not be raised so plentifully under free
as slave labor, but the contrary was proven to be the case. The
Growth of the largest cottou crop prior to the war was in 1860,
Cotton and and amounted to 4,669,770 balcs. This yield was
other Industries ^^^ reached again until 1871, and since 1876 there
has never been a year when the crop did not exceed that of 1860,
while in 1901 it reached the enormous total of 10,383,422 bales.
While formerly the South exported nearly all of her raw cotton
or sent it to the mills of New England, she now manufactures
a very large part of it, 1,583,000 bales having been woven by
southern cotton mills during the year 1901 as against 1,964,000
bales manufactured in the North. The opening up of coal mines
in the South for fuel supply, and the movement of northern
capital and skilled labor southward, may be ascribed as the
reasons for the increased manufacture of cotton in the South.
The growth and development of the cotton industry in the
South during the past forty years may be almost taken as an
example of the general development of the country in all lines
of activity. New industries have been constantly appearing and
old ones enlarging. New processes and improved machinery
have been constantly reducing the cost and utilizing products
which formerly were considered worthless. Many industries
have passed from the household or small shop to the large fac-
tory, where steam power or electricity have supplemented man
power, and thus cheapened production. The wonderful devel-
134 HISTORY OF COMMERCE.
opment of the natural resources of the country, the ambition
manifested by the people in all lines to supply home demand,
ever increasing on account of a large immigation, and to have
a share in foreign markets, have tended to stimulate all lines
of manufacturing during this period. Added to these, the pro-
tective tariff has given an additionl encouragement to a large list
of industries, and assisted in the general commercial advance-
ment.
In no class of industries has there been a greater advance-
ment in the methods of manufacture from the raw to the finished
product during the past forty years than in that of iron and
steel, and in none has there been produced a greater diversity of
finished products. The processes through which the metal
passes, from the ore in its natural form up to the manufacture
of almost an unlimited variety of articles for man's
steeUndustry Convenience, ranging from the spiral watch spring
up to the mammoth beam of structural steel, is
a triumph of inventive genius. One of the principal causes
of the enormous development of the steel and iron industry has
been the demand for railroad track, incident to the expansion of
our railroad systems. Iron rails were formerly used, but steel
has almost entirely superseded them. The substitution of coke
for coal and charcoal in the production of pig iron, and the
cheapening of the process of the manufacture of steel caused by
the introduction of the Bessemer and Siemens-Martin or open
hearth system, have tended to facilitate the use of steel in the
construction of buildings and otherwise, while the invention of
new machinery usually necessitates the use of steel in its con-
struction.
In 1859 petroleum was discovered in Pennsylvania, and the
supply from that region and from Ohio has thus far proven
inexhaustible. A method of refining the oil was soon after
devised, and there are now over two hundred products of this
mineral oil used for illuminating, lubricating, etc., the whole
PACIFIC RAILROAD. 185
constituting one of our most important industries. A great
demand for this oil in its various forms has made it an important
article of domestic and foreign commerce. Thou-
Petroieum°^ sauds of milcs of pipcs have heen laid from
wells to the seaboard and the Great Lakes,
and extensive refineries have been established in New York,
Philadelphia, Cleveland, Buffalo and Chicago. Large discov-
eries of fuel oil were made in Texas in 1901, affording a valuable
source of supply to western consumers, and proving especially
fortunate for use upon the great prairies of the west where wood
and coal are scarce.
In 1867 the United States again enlarged its territory, by the
purchase of Alaska from the Russian government for $7,200,000.
This has proven to be, like other extensions of our boundaries,
a profitable investment, the seal fisheries alone being worth
Alaskan much more than the price paid for the entire
Purchase couutry. Alaska is 1,200 miles long from north to
^ south, and 2,100 miles wide from east to west. It
is the chief source of supply of salmon fish, which abounds plen-
tifully, and the industry of fish canning here is the largest in the
world. Valuable gold mines have been discovered and par-
tially developed, and the country is no doubt rich in other
minerals. The extensive forests will also prove a source of
wealth to the nation.
One of the most important achievements of the decade fol-
lowing the Civil War was the completion in 1869 of the great
transcontinental line of the Pacific Railroad. The astonishing
development of the Pacific coast, and the travel and traffic that
inevitably followed, created an imperative need for a cheaper and
easier method of transportation to and from the
Railroad caast. This great achievement in railroad build-
ing, difficult as it was, has since been followed by
other routes across the continent. The cheapening of transporta-
tion, together with improved facilities for carrying perishable
136 HISTORY OF COMMERCE.
freight, has enabled California to market her fruit, one of her
great products, throughout the East. The Eastern and Middle
states have been brought next door to the West, and prices of all
commodities have tended to become lower to the consumers. Vast
areas of unproductive and apparently barren land in the West have
become productive and valuable because they are brought within
reach of a market.
At the commencement of the Civil War our foreign trade foot-
ed up about $700,000,000, the imports and exports being nearly
equal and the balance being about $20,000,000 against us. Our
principal export at that time was cotton. The war blockades
seriously interfered with foreign commerce, and especially re-
duced our exports, so that in 1865 these amounted to only
about $166,000,000, almost wholly from the Northern states.
The great staple, cotton, had been neglected or destroyed and
very little raised. Industries in the South were prostrated, and
Foreign homc Consumption demanded nearly all the North
Commerce after produccd. But the foreign commerce quickly
*^^ ^^ regained its activity, and continued to increase
until arrested in a measure by the panic of 1873, the imports,
however, considerably exceeding in value the exports. The
principal industries of the country at that time were the tex-
tiles, clothing, lumber, iron and steel, leather, boots and shoes,
flour and meal, sugar, paper, printing and publishing, farm
implements, carriages and liquors, malt and fermented. The
principal exports consisted of the great natural products, cotton,
petroleum, tobacco, wheat, lumber and iron, for the United States
had not yet arrived at the point where its manufactures could
compete with those of Europe. The depression which followed
the panic of 1873 caused a falling off in our foreign trade, but after
1875 trade revived, and for nearly ten years showed a steady in-
crease. The exports now began to exceed the imports, and
with slight exception have continued in that relation until the
present time. Since 1896 our imports have increased com-
FINANCE. 137
paratively little,* while our exports have enormously extended,
leaving a balance of trade in our favor of nearly $700,000,000.
The United States is now a vast exporter of meat and other
food products, while its manufactures are constantly finding a
wider market. The skill and ingenuity of American workmen,
with the latest and best types of machinery, enable the United
States to manufacture goods cheaper than Europe, while paying
American workmen larger wages than are paid in the old world.
In 1861 the banks throughout the country suspended specie
payment. The National Treasury was empty, and to carry on
the war the government resorted to an issue of paper money,
called "greenbacks." The volume of this currency ran up to
$450,000,000, and, as was inevitable, depreciated in value, thereby
causing a rise in prices of commodities. Two years later (1863)
the National Banks came into existence, with authority to issue
paper money based on their deposit of government bonds. Thus
the country went entirely upon a basis of irredeemable paper
Resumption Hiouey. After the war closed, it was the desire of
of Specie the government to get back towards a specie basis.
Payment ^^^ ^^ ^^^^t end proposcd to gradually pay off and
retire the greenbacks. This was done until the volume had been
reduced to $356,000,000 in 1868.
There was a general outcry against a contraction of the
currency. Speculation throughout the country was active
and business was constantly expanding. Corporations, indi-
viduals, cities and states were active in the promotion of their
various enterprises and works. An unprecedented mileage of
railways was constructed, and a corresponding bonded indebted-
ness floated. Thus the condition of the country was unstable.
Our foreign commerce from the year 1872 had been very un-
satisfactory, the balance of trade setting heavily against us, and
foreign investors had called in some of their loans. The crash
•Our total imports in 1901 were $823,172,165 and total exports amounted
to $1,487,764,991.
138 HISTORY OF COMMERCE.
came like a clap of thunder out of a clear sky when the firm
of Jay Cooke & Co. failed in New York. This was the begin-
ning of a general break in public confidence, and
Panic of 1873 - numerous failures of banks and business houses
. .:- all over the country followed. Credit in busi-
ness was refused, and debtors everywhere were pressed for pay-
ment. There was a general run upon savings banks, many of
which failed, disclosing shocking irregularities in management.
The prices of agricultural products declined, and manufactured
goods were a drug on the market. Factories closed or ran on
short time, and thus the months drew on until after nearly two
years business began to revive again. Severe as the lesson had
been it taught the people the necessity for a stable currency,
and resulted in steps being taken to reach the resumption of
specie payment, which was accomplished in January 1, 1879.
About 1876 there was a great advance in the production of
breadstuffs in the United States. The vast wheat fields of
Dakota were opened up to cultivation, and with improved farm
machinery and facilities for handling the immense volume of
grain there produced, grinding it into flour, or exporting it in
bulk by waterways to European ports, an immense industry grew
up and greatly added to the volume of our foreign trade. The
United States became at once the greatest exporter of wheat
and breadstuffs in the world, selling about one-
fhfNorthwist ^alf its crop to foreign countries. The method of
manufacturing flour was revolutionized and cheap-
ened about this time by new milling processes, and with low
rates for shipment by rail and water routes to the seaboard
through the Great Lakes and Erie Canal to New York or the
-St. Lawrence River to Montreal, where it was loaded into
ocean steamers, we were able to supply Europe with breadstuffs
cheaper than from any other source. In 1867 the United States
exported a little over eight per cent, of its wheat product, but
in 1880, with the increased production and foreign market
THE McKINLEY BILL. 139
opened up, this percentage had risen to more than forty per cent.,
and now Great Britain buys four-sevenths of all the flour the
United States has to sell.
The McKinley bill which became a law in 1890 enlarged the
free list, but advanced the duty upon many manufactured arti-
cles. The sugar consumed in the United States in 1890
amounted to nearly 1,500,000 tons, of which only 250,000 tons
were domestic product. Thus the protective duty on this article,
while benefiting the Louisiana planters, served to raise the price
on all sugar consumed throughout the country, and had little
effect in increasing the volume of the domestic output, owing
to the fact that the area of sugar land in the South was limited.
On the other hand to remove the duty entirely would destroy
the sugar planters of the South, who would be
and Reciprocity utterly unablc to compctc against the sugar grow-
ers of Cuba, owing to the fact that sugar can be
produced much cheaper in Cuba than in Louisiana. The Cuban
grower does not replant his cane oftener than once in eight
or ten years, while the Louisiana planter must replant every
second year. The Cuban grower also has the advantage of a
more favorable climate and a longer grinding season, with no
damage from frosts. Therefore, to protect the Louisiana sugar
grower and the public, the McKinley Act put sugar on the
free list, and paid a bounty to domestic sugar producers. At the
same time a discriminating duty of one-tenth of a cent per
pound was placed upon sugar imported from countries which
paid a bounty upon sugar exportation.
But the most important and interesting feature of this tariff
legislation was the reciprocity feature, due to the far-seeing
statesmanship of Secretary of State James G. Blaine.* His
foreign policy looked to a trade federation of the countries of
•Thomas Jefferson was the originator of the reciprocity idea, and in a
report to Congress in 1793 recommended reciprocity as the true method of
meeting the problem of our foreign commerce.
140 HISTORY OF COMMERCE.
the Western Hemisphere. He elaborated the Bureau of Ameri-
can Eepublics, and through his efforts, under the administration
of President Harrison, a Pan-American Congress
Reciprocity was held in Washington presided over by Mr.
Blaine. Eeciprocity treaties were concluded with
several countries, considerably extending our trade. Those with
Germany, France, Belgium and Italy resulted in relieving Ameri-
can pork from the embargo placed upon it in those countries.
Under the policy of reciprocity our foreign commerce increased
rapidly. Thus in 1891 we sent to Cuba approximately 115,000
barrels of flour; in 1892, 366,000 barrels; in 1893, 610,000 bar-
rels; in 1894, 662,000 barrels. After the repeal of the act, we sent
Cuba in 1895, 380,000 barrels of flour; in 1896, 177,000 barrels;
and in 1898, 130,000 barrels.
Nothing has contributed to the commercial growth and
development of the United States more than its railroad system,
which now reaches, with its multitudinous branches, nearly every
village in the eastern half of the republic, and all of the im-
portant towns in the western portion, while the trans-continental
lines provide great highways of travel and transportation from
ocean to ocean. The growth of our railway systems, from their
unpropitious beginning in 1827 to their present gigantic propor-
tions, embracing a mileage of nearly 200,000 miles, is one of the
most animated chapters in our national history. The
Railroads United States has a far greater mileage of railways
than any other country — more than all Europe, and
nearly one-half that of the entire world. About 1,300,000
freight and 26,000 passenger cars run upon these tracks, and
the net earnings foot up nearly $400,000,000 per annum. But
the railway systems of the United States have not only extended
in mileage but in even a greater degree in their capacity to move
freight and passengers. The roadbeds are more substantial than
formerly, the rails larger, heavier, and of steel instead of iron;
the roads have fewer curves, lower gradients, steel bridges,
LAND TENURES. 141
double tracks, larger cars and more powerful engines, so that
trains haul heavier loads and make better time.* Numerous
safety appliances, signals, improved air brakes and other devices
now contribute to the safety of railroad travel, and reduce the
loss by accidents. Withal there has been a general cheapening of
carrying cargoes, the average cost of carrying a ton of freight one
mile now being less than one cent, whereas in 1865 the cost was
upwards of three cents. With lower freight rates and quicker
service, together with refrigerator cars and special facilities for
carrying live stock and perishable articles like meats and fruits,
the market for these has widened, their price has cheapened and
become more uniform, and the cost of the necessaries of life to
the consumer has constantly tended to become lower.
Allusion was made to the division of the landed estates of
France under Napoleon, by which agriculture was greatly im-
proved, and also to the division by Henry VIII of England of the
large landed properties held by the monasteries during the six-
teenth century, and the beneficial effect of this division upon the
commercial welfare of the kingdom. Under the English law of
primogeniture the eldest son inherits the entire estate of his
father, and as a consequence there are yet large bodies of land
in England which have been held intact by a single individual
and his descendants from generation to generation for
hundreds of years, and which cannot be sold or di-
vided. This is greatly to the disadvantage of the agri-
cultural classes. To be able to own the
Land Tenures little farm which hc tills is a great encouragement
to the small farmer. He at once becomes interested
in its proper and successful tillage, takes care of the improve-
ments, and is decidedly a better farmer. The law of primo-
geniture and also the English doctrine of entailment, whereby
a testator can limit or restrict the future ownership of an estate
♦The time between Chicago and New York has now been reduced to
twenty hours.
142 HISTORY OF COMMERCE.
to certain persons and their heirs, was introduced into this
country as a part of the common law of England, from which
our system of jurisprudence was borrowed. These laws
were like a "dead hand" upon the land, sending it down for gen-
erations in the line of the eldest male. The aristocratic families
in New York and south of Pennsylvania were favorable to these
laws, as sustaining and perpetuating their leadership. Massa-
chusetts abolished these laws of inheritance but recognized their
spirit to a degree by giving a double portion to the eldest
son, according to the Mosaic code, but divided the rest among
the daughters as well as the sons, and this system prevailed
generally throughout New England and also in Pennsylvania;
but after the American Revolution, the founders of our repub-
lic, recognizing its injustice to a portion of the heirs of an
estate, and its objectionable feature as a hinderance to commer-
cial progress, chiefly through the efforts of Thomas Jefferson,
abolished it. Estates in this country can be subdivided or
transferred with ease, and are free from many of the prescriptive
rights and entailments which prevent or hinder transfers of
titles to land in the older countries. By a convenient system
of surveying the land and dividing it into counties, townships
and sections, located with reference to established meridians,
and the recording of titles upon public books of record, the
transfer of land is encouraged and made easy. This, we believe,
has had a marked effect, upon not only the agricultural classes,
by inducing thrift and industr}^, but also upon the general
progress and commercial welfare of the nation.
To signalize the attainment of the one hundredth anniver-
sary of the birth of the republic a great exposition was held
in the city of Philadelphia in 1876, in which were exemplified the
wonderful improvements in the industrial and mechanical arts
made since the Crystal Palace exposition in New York in 1853.
From the mammoth Corliss engine, which put in motion fourteen
acres of innumerable steel and iron organisms, the visitor could
EXPOSITIONS. 148
examine the processes of nearly every important manufacture on
the globe. Numerous great palaces, each devoted to a particular
department of human activity or achievement, were completely
filled with extensive and interesting exhibits, from not only the
United States but from all parts of the world. Egypt sent speci-
mens of corn, cotton, sugar, woods, fruit, honey and perfumery;
Australia sent wool, iron, wood, tin and agricultural products;
Centennial Switzerland, her far-famed watches; Norway and
Exposition Sweden, their glass work, wood carvings, porcelain,
' ^^ iron and steel; Holland, her excellent models of
dikes and sea coast defenses, bridges and dams; China, her jars,
vases and other ceramics; Japan, her porcelain and bronzes;
Italy, her fine art contributions; France, her vases, statuary, tex-
tiles and wines; England, her woolens, cotton and silk goods,
hardware, etc., and thus the infinite collection was made up,
proving to be a vast object lesson upon the achievements of the
race and the brotherhood of man.
The Centennial Exposition was only surpassed by the World's
Columbian Exposition held in Chicago in 1893 to commemo-
rate the 400th anniversary of the discovery of America. In
magnitude and grandeur the palaces of the White City surpassed
those of any exposition ever previously attempted. While the
displays were commensurate with the beauty, variety and extent
of the Palaces in which they were installed, the one great dis-
tinguishing feature of the exposition of 1893 was the display in
World's coium- elcctricity. In 1876 the telegraph constituted al-
bian Exposition most thc solc practical application of electricity to
*^ the utilities of man, but in 1893 we had the elec-
tric light in its varied forms, the electric motor for the propul-
sion of machinery and cars, the telephone and numerous other
adaptations of this wonderful though subtle power. The one
great lesson of this exposition was, that we had been, and were,
passing through an age of invention. Thousands of examples
were to be seen on every hand of inventions which multiplied
144 HISTORY OF COMMERCE.
human control over natural forces. In the language of President
McKinley at the Pan-American Exposition, his last public ad-
dress, ^'Expositions are the timekeepers of progress. They record
the world's advancement. They stimulate the energy, enter-
prise and intellect of the people and quicken human genius."
Through the inventive genius of man, manufactures have
been cheapened during the past hundred years, while at the
same time the price of labor has constantly advanced and the
hours have shortened, thus greatly improving the condition of the
working clashes. In 1790 carpenters received 60 cents a day;
in 1800, 70 cents; in 1810, $1.09; in 1820, $1.13; in 1830 to
1840, $1.13 to $1.40, and about the same up to 1860; in 1880,
$2.42; and in 1890, $3.50, with the day shortened
Rate of Wages from ten hours to eight. Common laborers in
1790 received 43 cents a day; in 1800, 62J cents;
in 1810, 82 cents; from 1810 to 1820, something over 90 cents;
and 1840 to 1860, from 874 cents to $1 per day.* While ma-
chinery has displaced hand labor, new industries have sprung
up to furnish work for all willing hands, and the shortening of
the hours, with better pay, has given workmen time and means
for self-improvement and social enjoyment. Under the modern
factory system men are brought into closer relationship with
others, and as a consequence a higher standard of intelligence
prevails. Low grades of labor are constantly giving place to edu-
cated labor, and what are luxuries to one generation become
necessaries to the generations which follow. This is illustrated
by the fact that "there was a time when a linen sheet was worth
thirty-two days of common labor, and a gridiron cost from four
to twelve days' labor."
In 1898 the Hawaiian Islands were annexed and now form
a territory of the United States. Their chief productions are
sugar, coffee, rice and bananas, the principal export being raw
sugar. The chief value of the islands, however, lies in the fact
♦Wright's Industrial Evolution in the United States.
ISLAND POSSESSIONS. U6
that they are situated at the crossing of the routes of ocean
travel between America, Asia and Australia, and afford a con-
Hawaiian and venieht coaling and supply station for ocean ves-
Phiiippine sels. As a result of the Spanish-American War,
Islands gp^.j^ ^^^g^ ^^ ^j^g United States in 1899 the island
of Porto Rico, one of the Antilles, and the extensive group of
the Philippines in the Pacific. Porto Rico produces cotton,
sugar, coffee, fine tobacco and tropical fruits. The climate is
healthful, and the island will no doubt be greatly improved and
developed by American capital. The Philippines are of volcanic
origin, with mountain ranges predominant, but the valleys are
adapted to tropical argiculture. The coast lands, plains and
valleys produce large quantities of Manila hemp, raw sugar,
tobacco and cocoanuts. The Manila hemp is of a superior qual-
ity, and the islands have practically a monopoly of the industry.
The United States and Great Britain take nearly all of the crop.
While the United States has for many years bought more than
one-fourth of the Philippine exports, its share of the imports
has been small. Under the new relation, however, as a territory
of the republic our trade will no doubt greatly extend. The
greatest value of the Philippines to the United States, however,
will no doubt prove to be their proximity to Asia, and the aid
they will afford in securing and carrying on an important and
constantly expanding trade with China, where our manufactures
are now being introduced.
Our total export for the year ending June 30, 1901, amounted
to the enormous sum of $1,487,764,991, being the largest volume
of exports during any year in the history of the republic. Of
this sum $944,000,000, or nearly 65 per cent., were the products
of agriculture, and of these breadstuffs, such as
Commerce whcat, com, rye, oats, barley, etc., amounted to
$276,000,000; cotton, $314,000,000; provisions,
comprising meats and dairy products, $197,000,000; animals,
including horses, cattle, hogs, sheep, mules and poultry, $52,-
146 HISTORY OF COMMERCE.
000,000; raw tobacco, $28,000,000; oil cake, $18,000,000. The
exports from the products of our mines, including coal and*
mineral oils, amounted to $28,000,000, or 2 6-10 per cent.; of
our forests, $55,000,000, or about 3 J per cent.; and fisheries,
$8,000,000, or about ^ per cent. The total export of the prod-
ucts of our manufactures in 1901 amounted to $412,000,000,
or about 28^ per cent, of the whole. The total imports of the
United States in 1901 amounted to $823,172,165, leaving a
balance of trade in our favor of $664,592,826. The total manu-
factures of the United States now foot up annually $13,000,000,-
000, which is about forty per cent, of the entire manufactures of
the world. This enormous increase of manufactures* places the
United States in the ranks of the great manufacturing nations of
the world; and whereas heretofore our exports have been chiefly
agricultural products, we may expect in the future a large in-
crease in the exports of our manufactures. We are now supply-
ing Europe with articles which we formerly imported, and
American products are establishing a reputation for excellence
in foreign markets. With the natural factors of production
yet largely undeveloped and in no prospect of exhaustion, aided
by the genius of the American inventor and the capacity and
enterprise of the American business man, wc believe the com-
mercial future of the United States is destined to a remark-
able development. Social and industrial problems may confront
us, such as combinations of capital and labor, tariff and finance,
but let us hope that these may all be wisely solved, and that as
our commerce grows in greatness it may be governed by the
principle of right.
♦In 1870 our total manufacturing amounted to about $4,250,000,000, or
less than one-third of their present value.
129°
125°
117°
rr
^^,Je,>,^^^'^^'ir II^^I-a/
lOb'Longitude 101° West
^S >„ '^' ^ >> K n j; V s I?*
I c
El)Ei
iultli
"■/
x
l.\
W)
lit
1 /
atei
^itbX
■^•J-.
'/'/fp
c: T
A U{ ^ I <'<'L
m
OKLAUO:
/Vv^
'■•"'s«k.,
X
i'«!-.
J/ C
T E X A^
T J.;
o
A iViN E X A 1^
Austii
121
117'
113 \
/
China I
16° I
109° 105^--^SA -— \
[~~^li8° 12(r 1-22° 124° 120^_4\ \ '^^ 1 '^
^"^ I fii phiufpineV ' c\''* ^
LUZON
PHIUPPINE^
ISLANDS
Cession of Spain;
1898
■ MINDANAl
SAM(
CeUeU I
Britis
Pacific TuTuiLA
172° lil°
'Jrtenvrieh
v e a n
het^
or T„V >-X
4
MONEY,
CHAPTER XIV.
NATURE AND USE OF MONEY.
AS AN ELEMENT IN CIVILIZATION; KINDS; BARTER;
ESSENTIALS OF MONEY.
Having traced briefly the history of the commerce of dif-
ferent nations and times, we shall now proceed to consider the
nature and uses of one of the most important instruments of
commerce, viz., money.
Under a republican form of government, where every citizen
is interested as a factor in making the laws, either directly or
indirectly, it is of prime importance that the subject of money
Importance of should be undcrstood. Under a clever play of
an Understand- words, politicians oftcn deceive the masses and lead
Subject them into dangerous fallacies upon this subject,
the result of which may be financial legislation of the most
serious and perhaps disastrous character. Nothing which Con-
gress can do will so directly and vitally affect the interests of the
people for their welfare and happiness, or their discouragement
and misery, as legislation upon this point, and likewise when
questions of monetary policy arise in the executive branch of
our government, the policy pursued by the president is of vital
importance to the people. If, for instance, owing to changes in
our financial policy there is a general rise in prices, debtors will
gain at the expense of creditors; a tenant with a long lease at
a fixed rental will gain at the expense of the landlord, and vice
versa. Thus one class will receive greater benefit and advantage
from the general wealth and prosperity of the country than
another.
147
148 MONEY.
The immense power for evil which may be caused by a gov-
ernment changing the currency is aptly described by Lord
Effects of Macaulay when he refers to the condition of af-
Changesinthe fairs in England at the close of the 16th century,
urrency when the currcucy was debased by Henry VIII and
Edward VI. He says: "It may be doubted whether all the
misery which has been inflicted on the nation in a quarter of a
century by bad kings, bad parliaments and bad judges was equal
to the misery caused in a single year by bad crowns and bad
shillings. The evil was felt daily and almost hourly in almost
every place and by almost every class.^' A similar state of affairs
existed in France after the Eevolution, when the constitutional
government flooded the country with irredeemable paper money.
"What the bigotry of Louis XIV and the shiftlessness of Louis
XV could not do in nearly a century was accomplished by thus
tampering with the currency in a few months. Commerce was
dead — betting took its place." Thus we see the importance of
universal enlightenment upon this subject of money, if we would
protect ourselves from the evils which result from ignorance.
Man in his primitive and barbarous condition lived upon the
spontaneous production of the ground. Advancing a little in
Man in the ^^^ ^^^^® ^^ civilization, he made a few rude im-
Lowest plements such as a bow and arrow, a spear and
Civilization fish-hook by which he was able to better supply
his wants. Thus far his individual needs were supplied by his
own efforts or those of other members of his family or tribe, but
as he advances a little higher in the scale of intelligence and
his wants increase he learns that it is an advantage to exchange
the products of his labor for those products of the labor of
others which he does not possess. The hunter
Barter cxchauges a carcass of meat or a skin, the product
of the chase, for a bag of corn; the herdsman ex-
changes with the carpenter, the tailor with the fisherman, etc.
This is called barter. This is the beginning of commerce.
MEDIUM OF EXCHANGE. 149
Here is the commencement of ^'division of labor/' that principle
which has produced such a high degree of efficiency in the arts
and sciences of our time. But observe the disadvantage of the
system. The herdsman may have sheep to exchange for a coat,
but the tailor may not need sheep, while the carpenter may need
sheep, but the herdsman may not require the services of the car-
penter, and thus the difficulty would always be to find a person
willing to make the desired exchange. In the early stages of
society when wants are few and simple the difficulties may be
overcome, but as man progresses and his wants multiply, it
becomes increasingly difficult for the members of the community
to make satisfactory exchanges.
From the foregoing we see that exchange is a necessity of
civilized life and in order to effect exchanges to any considerable
extent a "medium of exchange" (money) is necessary. The
earliest form of money was probably the skins of fur bearing
animals, and these are still used as a medium of
Exchange^ exchange among the Indians in the far northern
part of North America. Dried fish, shells and
beads were used as money by other Indian tribes. The early
Greeks and Romans used cattle and wine as money. Our own
history in colonial times furnishes numerous examples of various
articles having been used as money, among which may be men-
tioned tobacco in Virginia and Maryland and corn in Massa-
chusetts. The Pilgrim fathers found the aborigines using
wampum as both an article of adornment and a medium of ex-
change throughout New England. It was a kind of bead made
from a species of shell found in sea water. These beads were of
different sizes and colors, and their value was correspondingly
different. This species of money was an important factor in
the early civilization of New England. It brought the furs from
the north and west to the Massachusetts colonists and they in
turn exchanged these for sugar, tools and other commodities
with the English and Dutch traders. During the early settle-
160 MONEY.
ment of California by the gold seekers of ^49, gold dust by
weight was used as a medium of exchange.
Rising higher in the scale of civilization, we see the im-
portance of having a better medium of exchange. It must be a
Precious Commodity with great value in small compass. It
Metals as must bc Something in universal demand, so that
°"^^ it will circulate widely; it must be something
that is durable and will not suifer from decay or rust when
stored or from wear when in use; it must be something that is
divisible so that a great variety of denominations may be made
for use in the multitude of exchanges large and small. All of
these qualities point at once to the precious metals as the most
suitable articles to constitute the money of civilized man. Gold
and silver are sufficiently rare to embrace great value in small
space; they are distributed over the entire globe, like the human
race, and their quality is always the same wherever found.
Besides, they are metals which can -be readily used for other
purposes than for coinage, in case there should be a temporary
overproduction of them, so that their purchasing power may
be said to be more uniform and universal than that of any other
commodity. They are practically indestructible, being capable
of resisting rust, and when combined with an alloy of harder
metal, suffer little from abrasion. Gold may be refined, and al-
loyed, united and divided, with absolutely no loss whatever of
the pure metal. Silver suffers a very slight loss under such
treatment. It was soon discovered, too, that to reduce the wear
and tear to the minimum the most convenient form in which
the metals could be coined for use as money was round with
flat sides to receive the inscription or stamp of value and milled
edges to prevent clipping.
As previously stated, gold and silver are used extensively
for articles of adornment and as jewelry, tableware, etc., and
it is probable that their general usefulness as commodities first
suggested their use as money. The fact must not be lost sight
COINAGE. 151
of by the student of this subject that real money is a commodity,
and the selling of corn for gold is an act of barter. The word
barter is commonly used to signify the exchange
Money is a £ article for another without the use of
Commodity
money, but it must be remembered that all
trade is barter when the precious metals are employed as equiva-
lents, since these are commodities. This important fact forms
the basis for a correct understanding of the entire science of
money.
It will thus be apparent that the coinage of a precious metal,
while it changes its form, does not destroy its character as a
commodity, and the exchange of the substance,
n!l"^^^- \ whether coined or in its crude state, is an act of
Convenience '
barter. In fact it is not necessary that the metal
or other substance used as money should be coined at all. Gold
and silver were used as money before they were coined. They
were then measured by weight, and to avoid this inconvenience
the stamp was put upon them indicating the weight, which,
says Aristotle, was afterwards taken to indicate value also. All
that coinage does is to save the trouble of innumerable weigh-
ings and assayings which would hamper trade and prove so
troublesome and inconvenient as to largely destroy the usefulness
of money as a measure of value. Another advantage in coins of
the precious metals, early recognized, was their durability. There
was serious shrinkage and deterioration in fish or tobacco, as
money, and hides were not divisible, while all of these articles
were not easily transferred or transported from place to place.
All writers agree that the essentials of a good kind of money
are durability, portability, divisibility, homogeneity and uniform-
ity in value. These qualities seem to exist in gold
Money** *° and silver to a greater extent than is embodied in
any other two metals. Gold and silver, being com-
modities, are of course subject to some fluctuations in value,
and silver especially has shown a marked change in value in
152 « MONEY.
recent years, but on the whole these metals are nearest uniform
in value — fluctuate less than other commodities. Divisibility is
the quality which permits a metal to be divided without loss
of value. When a $20 gold piece is cut into a number of small
parts, the sum of these will be $20 less, of course, the few atoms
lost in the operation of cutting, which are very insignificant.
All parts of metallic money should be homogeneous, that is, of
the same quality, so that equal weights will have exactly the
same value. There may be different qualities of steel or iron,
but of pure gold or silver there is only one quality.
As an instrument of commerce and an aid to the progress
and welfare of man, money is indispensable. Without it divis-
ion of labor to any considerable extent would be
AMtTprogr^ess impossiblc; there would be little inducement to
work when the products of one's labor could not
be disposed of without finding persons who happened to want
such commodities and have others to give in return that he
himself would desire. The fact that there is in universal circula-
tion a commodity, the holders of which are ready to exchange
for the services of the farmer, mechanic, artist and inventor,
is a stimulus to effort and industry, and brings thousands of
products to market which could otherwise never have come into
existence. The use of money tends to bring mankind into
closer relations of inter-dependence, thus broadening the mind
and character, and teaching indirectly the doctrine of the
universal brotherhood of man. By distributing the products
of labor over the earth's surface where and when they are
needed, it is the means of banishing famine, while on the other
hand the absence of money tends to isolate man. Isolation
breeds suspicion and jealousy and these lead to strife, war, slav-
ery and famine.
CHAPTEK XV.
FUNCTIONS AND KINDS OF MONEY.
FOUR FUNCTIONS; SUBSIDIARY COIN; COMPARATIVE VALUE OP
SILVER AND GOLD; DEMONETIZATION OF SILVER, ETC.
Money has four functions, viz.: 1. A medium of exchange.
2. A measure of value. 3. A standard of value for future pay-
ments. 4. A store of value.
Money is as essential to the interchange of commodities as
language is to the interchange of ideas. Without some com-
mon medium of exchange it would be absolutely
ExchangT° impossiblc to Carry on the manufactures and com-
merce of the country. The rude system of barter-
ing one product for another as the parties may each need, is
only adapted to a low civilization where wants are few and sim-
])le. The history of civilization and progress is concurrent with
the history of money. The breaking up of feudalism in the
middle ages, and the growth of commerce, was due largely to the
introduction and use of money, by which the vassals were able
to pay their rent in money instead of services.
In order to effect exchanges of commodities there must be
an equality of values, and in order to establish this equality of
values a measure of value is necessary. A meas-
vaiue ^^^ ^^ value in the exchange of commodities is
as necessary as the yard stick or pound weight in
measuring quantities. It is useless to convert all things into
terms of money as a medium of exchange unless this is done at
certain rates, for without fixing the rate or measure of value
between commodities no exchange is possible. In this country
the standard unit of value is the gold dollar consisting of a
certain amount of gold and alloy fixed by act of Congress, and
all values are measured in dollars or parts of a dollar. Al-
153
164 MONEY.
though the gold dollar is the standard;, it is not necessary that
all payments be made in gold dollars. We use silver, nickel,
copper and paper as actual mediums of exchange, but of course
they are all founded upon the gold dollar as the standard. A
farmer agrees to pay a fixed proportion of his produce as rent,
say one-third of his corn, but when the time arrives for payment
he may, by agreement with the landlord, pay in gold, silver,
paper, wheat, cattle or any other commodity, the quantity
being measured, of course, by the value in gold dollars. In
other words, the medium of exchange or payment may be
different from the measure of value. We may measure in one
thing, and pay in another. The medium of exchange would be
useless unless measured in terms of the standard, and the meas-
ure would be useless without some medium of exchange by which
the transaction could be carried out. A person having an article
for sale desires to know what its value is, compared with other
articles; that is, to have it measured by a common, recognized
standard of value, but he also desires that, when he is ready
to sell the article, there shall be a medium of exchange by which,
he can dispose of all, or as much of it as he desires, without
having to resort to the primitive system of barter.
Since many contracts involve the payment of money at some
distant future time it is essential that money should possess
A Standard of stability or Uniformity of value. Suppose that in
Value for Fut- the casc of a lease for many years the tenant
ure Payments agpegg to pay a fixed rental in gold, and during the
term of the lease the production of gold at the mines should
be greatly increased — doubled, say. The result would be that
the value of gold would diminish and its purchasing power
would be reduced. Prices of other commodities would rise.
A gold dollar would not buy as much of anything as it did
before. Now the tenant would be able to sell his goods at higher
prices but his rent would remain the same in dollars. In this
case the landlord would suffer a disadvantage. Suppose, on
PF STANDARD OF VALUE. 166
the contrary, that the mines failed to yield the customary amount
of gold for a series of years and gold became scarce. Its scarcity
would increase its value. Then a dollar of gold would have
greater purchasing power and prices of other commodities would
fall. The rent under this long term lease would remain the
same, however, and the tenant must now pay his rent in dearer
money. The landlord in this case would reap an advantage,
as he would be getting a higher rent — the same rent nominally,
but of greater purchasing power.
The whole fabric of the business world is made up of an
endless series of contracts, many of them extending into years
of futurity for their fulfillment, such as contracts
Contracts ^^^ futurc delivery of goods, leases of houses and
lands, hiring of services for a term of years, the
settlement of estates of inheritance to be made upon the ma-
turity of minors, or the payment of pensions, annuities or life in-
I'surance, and it is important in all such undertakings that the
money which is our standard of value now, and the basis on
which the contract is made, shall continue uniform and finally
possess the same value or purchasing power at the end of the
])eriod of time for which the contract runs.
Were our standard of value such a commodity as wheat, an
abundant crop would diminish its purchasing power and cor-
respondingly raise prices of other commodities and vice versa to
the serious injury of one class and the benefit of another. For-
tunately for the commodity gold, which all of the most advanced
nations have chosen as their standard of value, its production
is remarkably uniform. The earth yields a constant and never-
failing supply of the precious metal, not of such abundance as
to affect its value or relieve man of the necessity of giving back
value in labor for value in gold received, yet in sufficient meas-
ure to repay the effort in seeking and mining it. It costs sub-
stantially a dollar in labor generally to get a dollar's worth of
gold out of the earth and coin it into money. Thus gold is
156 MONEY.
especially adapted to perform this function of the money stand-
ard of value for future payments.
Money may be said to perform a fourth function — that of a
convenient means of storing value. When acting as a medium
of exchange it circulates back and forth in the
y^iyg same locality, and may sometimes return to the
same person, but at times a person desires to con-
dense his wealth into small space and perhaps transport it to a
distant country, or hoard it away for a time. Money in the
form of the precious metals affords a convenient means of doing
this. It is true that other commodities of small bulk, imperish-
able quality, and great value, such as diamonds or other precious
stones, might be used for hoarding, and sometimes are, but
their value is not affixed or stamped thereon, and their future
value may not be uniform or stable. Gold coin is an exception-
ally convenient means of hoarding or transporting money, and
the facility with which it can be hoarded has a manifest tendency
to beget economy and encourage accumulation, especially among
the industrial classes. The large number of savings banks
throughout the United States, with their enormous total of de-
posits and millions of depositors, is largely the effect of frugality
and saving caused by the facility which the precious metals
afford for hoarding or storing value.
Subsidiary coin or "token money" may be defined as coin,
the nominal value of which as money is greater than its value
as metal, even making allowance for the cost of coinage. When
the government in 1834 changed the legal rate of
Subsidiary ^.j^^^ ^^ ^^j^ ^^^^ ^^ ^^ ^ ^^ ^^^ ^^^.^ ^^ ^g ^^ ^^
making sixteen grains of pure silver equal to one
of pure gold, the silver dollar then became of greater value than
the gold dollar by 2^ cents. Naturally people preferred to
pay their debts in the cheaper metal, gold, and silver ceased to
circulate. People who had silver on hand either converted it
to other uses or sold it to brokers who melted it into bullion
TOKEN MONEY. 167
and exported it to other countries where its full value could be
realized. We were then without silver for fractional aurrency,
except worn halves, quarters and dimes which had lost 2J per
cent, of their value by abrasion, and hence were equal in value
to so many cents in gold. Then the increased supply of gold
from California in 1850 caused a still further advance of If
per cent, in the price of silver, driving still more of the white
coin out of the country, and causing the remaining coins to be
still lighter and smoother. To remedy this difficulty and supply
the country with silver for fractions of a dollar, Congress in
1853 passed a law providing for the coinage of
Law of 1853 new silver half dollars, quarters, dimes and half
dimes about seven per cent lighter than the former
ones. There being no inducement to melt these coins into
bullion or export them, they circulated at par with gold (except
during the suspension of specie payments), although their
metallic value was considerably less than their nominal value
as silver. This was the beginning of silver as subsidiary coin
in the United States.
The price of silver continued to fall, as compared with gold,
until 1874, but during all of this time no silver dollars were in
circulation, silver being worth more than gold. In 1873 Con-
gress passed an act demonetizing silver. The
ofTuve*r^*'*°° JTietal in the silver dollar at the time of the pas-
sage of the demonetization act was worth two
cents more than a gold dollar, but the price of silver has since
continued to decline until it has become worth less than half
its nominal value*. It now circulates freely as subsidiary coin,
since the amount of silver coined and in circulation is limited
and it is receivable for all public dues. Receiving it for public
dues is one way of redeeming the coin. Besides silver we
♦Congress passed an act in February, 1878, remonetizing silver, but not-
witlistandlng tills its value has continued to fall, and it only circulates at
its nominal value because the Government receives it at the equivalent of
gold at the custom house and tax office.
158 MONEY.
have subsidiary coin in the form of fractional currency, consist-
ing of copper and nickel. These are redeemable by the govern-
ment in gold when presented in sums of twenty dollars or more.
Paper money consists of printed promises to pay a given
sum of money to the holder on demand. It is the government's
promise to pay. It is not money, in reality, but
Paper Money represents money, and circulates instead of the
actual coin. We call it money because it circulates
from hand to hand and performs some of the functions of
money, and because it will purchase our wants the same as
money. It is redeemable or convertible into actual money on
demand, and is issued either directly by the government or by
banks under the authority of the government. There are
several important advantages in favor of the use of paper money.
It is lighter than coin and hence more convenient to carry in
the pocket. Coin loses by abrasion, but paper can be readily
replaced with new. Paper money can be sent through the mails
or transported by express much more easily than coin.
Paper money may be divided into two kinds, distinguished
on account of the origin of each, viz.. Fiat Money and Eepresenta-
tive money. These may be further subdivided as follows:
f Greenbacks
' Fiat
•< Treasury Notes
Paper
( National Bank Bills
Money
j Gold Certificates
( Silver Certificates
^ Eepresentative
Fiat money consists of promises to pay by the government
direct, or by banks under authority and control of the govern-
ment, founded upon the faith of the people in the
Fiat Money stability and credit of the government. Such
bills are issued under a special law which limits
the quantity, pledges the government to redeem them in gold
on demand, and provides for a sufficient reserve fund of gold
coin, to be kept on hand to redeem the bills in circulation.
GRESHAM'S LAW. 159
The advantages of fiat money are that it enables a nation
to increase its circulating medium rapidly, or temporarily, with-
out increasing its stock of precious metals. The increase in the
volume of coin must necessarily be made slowly, as the metal is
mined and coined, but the demands of trade or the exigencies of
war may require an increase iii the volume of the money of the
country to be made quickly. ^..Now it has been found by experi-
ence that where public confidence in the government remains
unshaken, a reserve of one dollar in coin is a sufficient deposit
to maintain a circulation of three dollars in paper, on the prin-
ciple that all the bills will not be presented for redemption at
one time.
From the foregoing it must not be inferred that the govern-
ment can create value or make as much money as it chooses.
Government "^^^ govcmment Can no more create value than it
Cannot Create cau crcatc gold or coiu. It may say how many
^^'"^ grains of gold shall constitute a dollar or how
many pounds shall constitute a bushel of corn. It may decree
that a quantity of gold coin or bullion shall be deposited in the
national treasury and it can, within certain limits, issue its paper
promises to pay, representing this real money, but this is the
extent of its power. If it exceeds this limit, and at times there
have been strong temptations to do so, the result is inflation.
The money begins to depreciate and falls below par. It circu-
lates only at a discount, and cannot be exchanged for real money
except at a loss. The people lose faith in it. Gold is driven out
of circulation by it, because, according to the law of values
announced by Sir Thomas Gresham three centuries ago, called
^'Gresham's Law," the cheaper money always drives out the
dearer, people preferring to pay their debts with the cheapest
money which their creditors can be induced, or by law compelled,
to accept.
As seen from the foregoing, fiat money may be redeemable
in coin, that is, it may be "convertible" into gold at the will of
160 MONEY.
the holder, or it may be founded only on the faith of the people
in the stability of their government, or "inconvertible." The
Convertible former is a convenience and aid to commerce, be-
and inconvert- caiisc it increases the circulating medium without
ibie Notes impairing its stability. The latter is inflation
and brings in its train serious financial and industrial dangers.
Representative money consists of certificates of deposit issued
by the government for gold or silver deposited in the treasury.
These certificates circulate as money instead of the
Mon'ey*"**^*^*' ^^^° which they represent. The coin can be had
by the holder of the certificate upon demand. The
representative money of the United States consists of gold cer-
tificates and silver certificates. The theoretical difference be-
tween these and greenbacks or treasury notes is that the latter is
issued in excess of the redemption fund on which they are based,
while gold and silver certificates can never exceed in amount
the coin on deposit.
CHAPTER XVI.
THEORIES OP MONEY.
COINAGE; VOLUME OF MONEY; SUBSTITUTES; MONOMETALLISM;
BI-METALLISM.
Coinage is the process of manufacturing bullion into money
of proper form, weight and fineness. This is done only by the
government, at its mints. Private individuals are not permitted
to coin money, owing to the inducement which
FuncriorT"^^'^' would cxist foF the practice of fraud and the ease
with which it could be practiced. In ancient times
kings (notably Henry VIII, the first Defender of the Faith)
debased the coin of the realm and thus cheated their subjects
to enrich themselves, but in modern times money is as accurately
coined as human skill is capable.
Gold and silver circulate between different countries by
weight, simply as merchandise, the risk of being defrauded by
inferior quality or adulteration being left entirely to the receiver
of the metals, but in domestic commerce the majority of people
have not the skill nor facilities for weighing or determining the
value of coin received in every transaction, hence the enormous
convenience to have each coin certified as of proper weight and
fineness by the highest authority.
Within the sphere of the subject of coinage Congress must:
1. Fix upon the metal to be the standard of legal money. 2. Es-
Dutiesof tablish a unit of value. 3. Fix the weight and
Congress as fincucss of the uuit and of other pieces, its frac-
to Coinage tious and multiples. 4. Choose proper inscrip-
tions for the various coins. 5. Determine the weight, fineness
and value of all coins of other metals used as money, compared
with the standard. 6. Decree how much money shall be coined.
In passing upon these questions at different times, our Congress
161
162 MONEY.
has finally established gold as the standard, one dollar as the
unit, 25.8 grains as the weight, and nine-tenths pure as the
fineness, and made its coinage free and unlimited; that is to
say, all who bring gold bullion can have it coined by paying the
mint charge, or seigniorage. Congress has decreed that a silver
dollar shall consist of 412J grains of silver nine-tenths pure,
and that its coinage shall be restricted.*
It is customary to attribute most of our financial ills, such
as depression in trade, "hard times," lack of employment and
low prices to a scarcity of money, and to believe
Money^ ^^^^ relief lies in starting the mints to work or
the printing presses to turning out bills. With a
desire to be useful to their constituents our legislators often
undertake to cure the afflictions and poverty of the people by
tampering with natural laws in the financial world, with the
result, however, that they only aggravate the difficulty. The
question then properly rises, how much money does a nation
really need? To answer this is exceedingly difficult, since a num-
ber of elements enter into the problem, some of which are very
difficult to ascertain. First of all, the volume of money which
a nation needs will depend upon the size of i^s population, since
the greater the number of persons engaged in trade the greater
the amount of money required to conduct that trade. Then
again the amount of money must depend to a considerable extent
on the commercial activity of the people. A highly organized
nation will require more money per capita than one of fewer
activities. The more business done, goods manufactured, bought
and sold, the more money a people will require as an instrument
of trade and commerce. The value of the goods also will affect
the question, and the higher the price of the goods the more
value changes hands, and hence the more money will be required
to represent that value and affect its changes. Now the
*At this point let the student ascertain what amount of silver is now
being coined and under what restrictions.
VOLUME OF MONEY. 163
amount of a nation's foreign commerce is easily ascertained
since it must pass through the ports of entry, but the volume
of inland traffic, the innumerable transactions carried on be-
tween citizens of the same country (and this is by far the larger
part of a nation's commerce) cannot be estimated accurately.
Hence some of the data which enters into the question of the
volume of a nation's money cannot be supplied.
It is also apparent that the rapidity with which money cir-
culates has an important bearing upon the question of volume.
A "nimble penny" will do more business than a
cfrcuiation sluggish dime. A dollar which changes hands ten
times serves as a medium of exchange equal to ten
dollars in one exchange. In these days of quick transportation
of goods and rapid interchange of commodities and information
among the people, the volume of money would necessarily need
be very large were it not for the substitutes which have been
devised to take its place.
The substitutes for money in a modern, highly civilized
nation are checks, drafts, money orders, certificates of deposit
and promissory notes. These are representatives of money, and
by their use an immense volume of business is
M^on^ey "**^ *°*' transacted without the handling of any real money.
The general intelligence of the people by means
of which they are able to properly and safely use the various
forms of business papers, an extensive banking system by which
every town of any importance is provided with banking facili-
ties, the bank clearing houses in all of our large cities whereby
the exchanges between banks are effected with the use of but
a very small fraction of actual money — all these, the machinery
of finance — combine to reduce the need for a large volume of
the circulating medium.
The average daily transactions in the Bank Clearing House
of London is £34,000,000 which if paid in gold coin would
weigh about 364 tons, and would require fifty heavy, two-horse
164 MONEY.
drays to transport it. If paid in silver it would weigh 5,150
tons. The clearings in the New York Clearing House average
daily about $250,000,000, and yet this vast volume of trans-
actions is settled by the use of less than 5 per cent, of the
amount in actual coin or legal tender notes, and even this
amount, except for sums less than $5,000, is often paid by means
of clearing house certificates.
When business is prosperous, that is when a large volume of
sales are made or goods manufactured, so that a greater quantity
of money is required to carry on the commerce of
Self-Regulating the country, gold is attracted from abroad, and
like other commodities, seeks the place of strongest
demand. Like water, it seeks its level. On the contrary, the
history of the past teaches us that when trade slackens and a
smaller volume of the circulating medium only is required, if
the several kinds of money are founded on gold as a standard,
or are redeemable in gold, there will be an outflow of gold until
the excess is relieved. But if on the other hand the circulating
mediums are not upon a gold basis but are in the nature of fiat
money, there will be a general depreciation of the whole volume
of the currency. Thus the law of supply and demand affects
to a certain extent the quantity as well as the value of a nation's
money. Then again the volume of money in circulation affects
the prices of all other commodities. A scarcity of gold means
low prices of all commodities measured by gold, because the
scarcity of any commodity makes it dearer, and the dearer gold
is the greater its purchasing power — the more things it will buy.
And the more plentiful gold is, or other money equivalent to
or redeemable in gold, the lower will be the prices of all other
commodities, because money w411 be cheaper, and will purchase
less. Fluctuations to any considerable extent in the volume and
value of the money of a country, especially if sudden, must
necessarily be very injurious to the welfare of the people, because
they unsettle values and make the future of time contracts
uncertain.
MONOMETALLISM. 165
From the foregoing we may conclude that the volume of a
nation's currency is not necessarily a measure of its wealth,
and that the wisest and safest method of regulating the amount
of money in circulation is to leave it perfectly free to follow the
inevitable laws of supply and demand. As a nation grows
older its laws more stable, wise and just, it will attract money
from other nations, as well as add to its supply by the product
of the mines, and its volume of money gradually increases to
meet the requirements, the same as the amount of wheat or
cotton raised.
Monometallism consists in fixing upon a single metal as the
standard of value. The two metals chiefly used as money are
gold and silver. Of these silver is more widely
Monometallism and plentifully distributed than gold. It is usually
formed in larger deposits and is more easily mined,
hence its value is much less than that of gold. If the relative
commercial values of the two metals would always continue
precisely the same, the government could ascertain that value
and fix the legal ratio accordingly, but the production of the
two metals does not continue uniform, and hence their values
are subject to change. An increase in the output of silver or a
decrease in the production of gold, or vice versa, causes the com-
mercial values of the two metals to fluctuate and thus change the
actual or commercial ratio between them. Now, according to
Gresham's Law, as before explained, when two metals are legal
tender, and one is cheaper than the other, the cheaper invariably
drives the dearer out of circulation, because a debtor Avill always
pay in the cheapest coin which his creditor is compelled by law
to receive.
From the establishment of our coinage system in 1792 until
1873 gold and silver were both legal standards of value, coined
in unlimited quantities. The ratio from 1792 to 1834 was 15
to 1, but since the commercial value of silver was slightly below
this ratio, gold was gradually driven out of circulation and so
166 M0N1S1?.
continued almost without interruption until in 1834. In 1820
Mr. Raguet wrote to the "National Gazette" to explain the reason
for "the disappearance of gold from the United States/' Two
years later he wrote on the same subject, saying that "although
the coinage of gold continued to he large ($1,319,030 in 1820)
not a gold coin was anywhere to be seen in circulation." The
gold was exported as fast as the mint turned it out with its
weight and fineness fixed. To change this state of affairs Con-
gress in 1834 changed the ratio to 16 to 1. This ratio over-
valued gold and thence it became the cheaper money. Silver
was driven from our shores, and fractional coin was kept in cir-
culation only by making the half dollar, quarter dollar and
dimes short in weight. In 1873 silver was demonetized, leaving
gold as the sole standard, and reducing silver to the position of
subsidiary coin. In this capacity it now circulates with gold.
The argument of the monometallists is that in no other way can
both metals be kept in circulation than by making one a standard
and the other subsidiary coin. History seems to support their
contention.
England adopted the gold standard for herself and her colo-
nies, including Australia, in 1816. Germany demonetized silver
Single ^"^ ^^'^^^ ^^ ^^^ S^^^ standard in 1871. Her ex-
standard ample was soon followed by Denmark, Norway and
Nations Sweden. The gold standard also exists in Portu-
gal, Turkey, Egypt and a few South American states. The silver
standard prevails in Russia and Austria in Europe; China, India,
Central America and Mexico.
Bi-metallism means the use of two metals, gold and silver,
as standards of value. Those who advocate bi-metallism contend
that there is not sufficient gold to supply the
Bi-metallism mouey need of the world, and that if the gold
standard were universally adopted it would cause
a gold famine which would be exceedingly disastrous to the
financial welfare. It is further contended that by placing the
MONOMETALLISM AND BIMETALLISM. 167
entire burden as a standard of value upon one metal the use and
importance of that metal is accordingly augmented and its value
increased, causing a corresponding decline in the values of all
other commodities.
But the strongest argument in favor of the double standard
is that one metal acts as a check upon the fluctuations of the
other. If two metals are equal as money standards, and one,
for instance gold, should rise in value, this would bring the
cheaper metal into more active use, thereby relieving the pressure
on gold, or lessening the demand for it, and causing it to fall.
Likewise if silver should become dearer, gold would be more
extensively used in making payments instead of silver, thus
bringing the two metals nearer an average of value and main-
taining that uniformity which is so important as a measure of
value. The bi-metallists contend that the uniformity of value
of our standard is of far more vital importance than having the
two metals circulate together, and that the lack of one metal in
circulation can be supplied by other forms of money if necessary.
The question may yet be regarded as an unsettled one among
nations, with the tendency principally in the direction of the gold
standard. The countries now having the double standard are
France, Italy, Belgium and Switzerland, constituting what is
known as the "Latin Union/' Spain, Greece, and a few South
American states.
HISTORY OF BANKING,
CHAPTER XVII.
PRIMITIVE BANKING.
BANK OF VENICE; AMSTERDAM; WISSELBANK; BANK OP FRANCE;
FRENCH SYSTEM.
Banking, as we understand the term, had its origin in the
Italian cities during the middle ages. Prior to that time "bank-
ers" were merely money changers, who set up their banks or
benches in the streets or market places of the cities of the Orient.
Money changers were numerous in the cities of Greece and
Egypt. They kept no books, received no deposits, made no loans,
sold no drafts or bills of exchange and issued no circulating cur-
rency, hence they scarcely possessed any of the real functions
of a bank. But when prosperity came to the cities of Italy,
and their ships were upon every sea, the merchants
Bank of Venice fouud need for othcr and better facilities in their
financial operations, and hence was gradually de-
veloped the first banking institutions. The first bank, however,
that of Venice, had a peculiar origin. It was founded in 1171
as a combined result of governmental necessity and tyranny.
The republic needed money to carry on its wars with Genoa,
and levied forced contributions upon the leading mercantile
firms and wealthy citizens, in return for which they were given
perpetual annuities at a fixed rate per annum. The payment
of this annual interest was the means of establishing the bank,
and as the annuities were often transferred from one holder to
another, or passed by devise or descent to heirs, the transfer was
made upon the books of the bank, the same as in the case of the
transfer of the stock of a corporation at the present time.
168
AMSTERDAM. 169
Finally, to avoid the frequent and numerous entries on the books
of the bank, certificates payable to bearer were issued and passed
from hand to hand, the same as bank bills of the present day. A
little later bills of exchange were introduced as a means of
transmitting money safely through provinces where property
was unsafe from robbers and barbarians, but it was not until
three hundred years later (1487) that the system of banking thus
begun had developed to the point of deposit banking, and the
issuing of circulating notes by this same bank. The Bank of
Venice played a great part in the commercial history of its time,
proving a vast aid to both the government and the mercantile
houses, and yet it answered very imperfectly the modern defini-
tion of a bank.
During the sixteenth and seventeenth centuries the commerce
of Holland supplanted that of the Italian cities, and Dutch ships
were carrying the produce of the world. Amsterdam then
became a commercial and financial center. For a time the com-
merce of the world seemed to focus there. Foreigners came to
buy, and found the products from all parts of Europe, Asia
and the East Indies, carried thither in Dutch ships. Money
Amsterdam as Aowcd iuto Amsterdam from foreign countries in
a Financial payment f or goods and shipping charges, and this
stream of payments made it convenient to settle
in Amsterdam the financial transactions of other cities, such
as Antwerp and Eotterdam. Thus Amsterdam became a com-
mercial clearing house for the world's commerce, the same as
London and New York are at the present time. Bills of ex-
change came into Amsterdam for collection, and the volume of
financial transactions rose to a large figure. Such a concentra-
tion of dealings in money could not fail to develop a convenient
system of banking. "Individuals began to deal in foreign ex-
change and to buy and sell coin and bullion; and, sometimes in
connection with the exchange business, and sometimes inde-
pendently of it, began to receive money on deposit, and to effect
m HISTORY OF BANKING.
payments, when ordered by customers, by transfer from one
account to another." Thus the business of banking gradually
developed to meet the requirements of commerce until by the
middle of the seventeenth century it is probable that many of
the functions exercised by a modern bank were in use, except
the issuing of a circulating currency.
A great variety of coins were in use in the different Dutch
provinces, and to these was added the influx of gold and silver
Establishment of various Weights and values from other nations
Amst*eSim°* ^^ ^^^ regular course of foreign commerce. The
X609 rixdaler was the standard of value, but a large
portion of the coins in circulation was light in weight, either
from abrasion, clipping or debasement. Kings were accustomed
to debase the coinage in order to replenish the public revenues.
As a consequence the coins of full weight disappeared con-
stantly, leaving the inferior pieces in circulation. Instead of
attempting to regulate the coinage itself, the city fathers of Am-
sterdam ascribed the confusion in the circulating medium to
the free banking privileges which prevailed, and attempted to
correct the evil by regulating the dealings of private bankers.
Their first law was leveled against deposit banking, and by the
act of July, 1608, deposit holding was absolutely prohibited, and
the receiving or paying out of money for another person, or its
transfer by writing, "or by word of mouth, directly or indirect-
ly" was forbidden. The use of bills of exchange was also strictly
forbidden. The culling of coin, or selecting the heavy coin
from the light was also strictly forbidden. Thus did these ancient
law makers display their ignorance of the laws of trade and
finance, and while attempting to correct evils which they did
not understand, only served to retard the wheels of commerce.
Finally they decided to create a great financial institution, which
should concentrate under public authority the business of receiv-
ing deposits and dealing in specie, and as a result, in 1609, was
established the Bank of Amsterdam, more properly called the
WISSELBANK. 171
Amsterdam Wisselbank (i. e. Amsterdam Exchange Bank). The
bank created several agencies or branches in different parts of the
city, and thus, under the law, monopolized the business of blink-
ing and dealing in money and exchange.
The advantages offered by the Wisselbank to the commercial
world, of which Amsterdam was the center, were security for
deposits and a uniform value in its transfers; and while the
multitude of debased coins continued to circulate in the chan-
nels of trade the same as before, the deposits in the bank were
a standard of value. The bank received only money of full
weight and paid out only such, hence a credit
the^Ban!f ^'^ ° upou its books was equivalent to so much good
coin. Credits in the bank were frequently trans-
ferred, and came to be called "bank money." Payments made
in "bank money" were preferable to payments made in "current
money," owing to the established value of the former. Such
payments or transfers were made by means of orders required
to be presented by the payee in person, or his authorized agent,
but the payee did not receive the credit for the transfer until
the following day. This is the first exemplification of the
check system, but it fell far short of its modern uses. Even this,
however, was a great convenience to the commercial public.
The law required that all Bills of Exchange payable in Amster-
dam should be settled for by transfers in the bank, and this had
the advantage of assuring foreign holders that exchanges on
Amsterdam would be paid in standard money, thereby giving
stability and uniformity to exchanges and encouraging foreign
trade.
Every merchant was obliged to keep an account with the
bank in order to pay his foreign bills of exchange, and once
having made a deposit it was to his advantage to continue it,
because the moment he withdrew his money and mingled it with
the current money in trade, from which it was not readily
distinguishable, it fell in value to the level of the current
172 HISTORY OF BANKING.
money. "While it remained in the coffers of the bank its su-
periority was known and recognized, but when it came into the
hands of private individuals, its superiority could
a Deposit" ° not well be ascertained without more trouble than
the difference was worth" (Adam Smith in
Wealth of Nations). The difference in value between money in
bank and current money sometimes reached as high as nine
per cent., but was usually about four per cent., and this (called
the agio) the depositor lost by withdrawing his deposit.
In 1683 the bank established a system of making advances
Upon deposits of coin. Under this system a depositor was
allowed to withdraw an amount of bank money not far from
the value of the specie, and upon this he was charged interest.
These advances were commonly made for a period of six months,
and in ease the borrower failed to renew or pay the loan at
maturity, the margin of his deposit over and above the amount
of his withdrawal was forfeited to the bank. The
Advances on -i • p j • j -j
Deposits business ol advances upon specie deposits grew m
the eighteenth century to an enormous volume,
and completely superseded the earlier practice of simple deposit.
Then the administrator of the bank began to permit individuals
at times to transfer more bank money than their deposits of
specie warranted, which was equivalent to giving permission to
overdraw.
Mismanagement and a diminishing commerce are the causes
which, after two hundred years of useful services, led to the
decline of the Wisselbank. Wars and the growth of manufact-
ures had changed the channels of trade, and Dutch ships no
longer possessed a monopoly of the carrying business. The
center of the financial world moved westward to
Q^ * London, and the Bank of England was coming
into prominence as a great financial agent. Be-
sides there had come about a desire for an improvement in
the system and methods of bankins^ to conform more to the
BANK OF FRANCE. 173
requirements of commerce, a larger scope in bank functions,
and the Bank of England was more in conformity with this
idea. The Wisselbank was finally dissolved and went out of
business in 1819. The present Bank of the Netherlands, which
may be considered its successor, was founded in 1814 with
authority to make loans upon commercial paper and other public
securities. It is also the bank of issue of the currency of the
Netherlands, and keeps the funds of the state and the cash of
the postal savings banks. There is no limit upon the circulation
of the bank, but the law requires that it must be secured by a
reserve of two-fifths of the aggregate of the circulation and
demand liabilities. This reserve consists chiefly of gold.
The Bank of France was established in 1800, the First
Consul being one of its original stockholders. In 1803 its scope
was enlarged and it was endowed with the exclusive privilege in
Paris of issuing circulating currency, a monopoly which was
finally extended so as to cover the whole of France, and which
it still enjoys. In some respects the bank is the
ofFranM greatest of financial institutions, and enjoys a
reputation for solidity at home and abroad. While
the Bank of France is the only one of issue, there are numerous
private banks in Paris and scattered throughout the country
which do a general deposit, discount and exchange business.
The capital of the bank is 182,500,000 francs, and its circula-
tion limit is 5,000,000,000 francs — the greatest of any financial
institution in the world. While nominally a private banking
house, the Bank of France is really a semi-official institution,
for the reason that, being a monopoly, its operations are under
government control. The management of the bank is vested in a
board of fifteen regents and three inspectors or auditors, but the
governor and two deputy governors are appointed by the Cham-
ber of Deputies. Only the 200 stockholders who hold the
largest number of shares are allowed to attend the annual meet-
ing and participate in the election of officers. French states-
174 HISTORY OF BANKING.
men believe that private ownership of the bank is an advantage,
since it and the government have thus been enabled to be of
assistance to each other at various times, in financial and politi-
cal crises. M. Thiers said, "The bank saved us because it was not
a state bank," by advances when the government was hard
pressed, as in 1871. On account of its issue of the circulating
medium, the impression prevails among the uninformed people
of France that the bank is a government institution, and it is
respected as such, but business men know that while this is not
the case, the government could not allow it to fail, and that
behind it is the fortune of the nation. The note issue is regu-
lated by law, and has been gradually increased until it has
reached its present enormous volume.
The functions of the bank as prescribed by law are: "To
issue bank notes payable on demand; to discount bankers' drafts
and commercial bills, drawn at a fixed period not exceeding
three months and bearing the names of business people and
others well known to be solvent; to collect bills remitted them
by private parties or public establishments; to receive in account
current sums for deposit with the bank by private individuals or
public institutions, and to pay amounts drawn to the extent of
the funds deposited; to keep a record of voluntary deposits of
all securities, bullion and all kinds of gold and
the"Bank^° silver moucy; to make advances upon French bills
and French securities, upon bullion and foreign
coins, in accordance with a certain proportion fixed by law and
the terms fixed by the statutes of the bank; and, finally, to deliver
to any person applying therefor orders from Paris to their branch
offices, and orders on Paris from the branch offices."
The bank does an extensive business in discounting short
time commercial paper, according to the above-mentioned regu-
lations, but its business in this line is considerably hampered
by its rule which requires three names to each paper. This
compels many merchants to discount their paper through brokers
BANK OF FRANCE. 175
or private bankers, who, after endorsing it, re-discount it in the
Bank of France.
To satisfy the demand for banking facilities in the provincial '
towns of France, the bank is required to maintain in each
department (equivalent to a state) in the republic, a branch with
a capital allotted to it by the parent institution in Paris. These
branches, which now number more than one hundred, are con-
ducted under the supervision of the head bank, and can engage in
no operation with other banks or with each other without special
leave. Their business, even to the rate of discount, is directed
in Paris, and not with reference to local wants. The local
managers are frequently strangers sent from Paris
Branch Banks and are not in close sympathy with the business
public. Nevertheless the branch banks discount
a large amount of commercial paper, besides issuing bills of
exchange, collecting government revenues, stamp duties, etc.
The note issues of the Bank of France are regulated by law.
The volume has been increased from time to time until now the
limit is 5,000,000,000 francs, with an actual circulation of about
3,600,000,000. This large circulation of the bank is, according
to Conant, in a measure due to the large quantity of silver in the
reserve of the bank. The bank has made repeated and continu-
ous attempts to force its five franc pieces into general circulation,
but they constantly and persistently flow back to the bank, the
people preferring paper currency based upon the gold and silver
reserve in the bank vaults. The circulation of the
Not"s* *°^ bank is divided into two classes, denominated as
"productive" and "non-productive." Notes issued
to meet the demands of commerce, and which are secured by
discounted bills, are called productive, probably for the reason
that interest is earned, and are subject to a tax of 50 centimes
per 1,000 francs, while those issued against specie or bullion are
called non-productive, and pay a tax of 20 centimes per 1,000
francs. As soon as a bank note passes into circulation it is a
176 HISTORY OF BANKING.
legal tender for all debts, public and private, so long as the bank
maintains specie payments. They are guaranteed by gold or
silver coin, by loans made upon gold or silver bullion, by securi-
ties or public funds, by loans made to the government, or by
drafts discounted upon the terms prescribed by law.
The Bank of France has the option of redeeming its notes
in either gold or silver, and it does it in whichever metal seems
most advantageous at the time. In case a note-holder desires
gold when silver is offered him, or vice versa, the bank exacts
a small premium, as a compensation for paying in the other
metal. It has been the policy of the bank to keep on hand a
large gold reserve and prevent the exportation of the yellow metal
as far as possible. This has been done by charging
of*Notls*'°" ^ premium on gold for export. The gold reserve
in the Bank of France is, in round numbers,
2,500,000,000 francs, or about one-half the authorized limit of
circulating notes. The silver reserve is in the neighborhood of
1,000,000,000 francs. There is no law fixing the amount of coin
reserve, or proportion of specie to be held against the notes in
circulation. In a time of crisis the government can give the
notes of the bank a forced circulation, in which case the bank
would be relieved from the necessity of redeeming its notes in
coin.
The enormous volume of the circulating medium of France
is necessitated to a considerable extent by the fact that it is a
country of small traders, as well as small farmers, and the
minute division of properties and enterprises is not favorable
to the use of bank checks to the same extent as in countries
where industries are more consolidated and cen-
MoneT°^ tralized. Then again the masses of the French
people are not educated in the use of checks, or
accustomed to their use as we are, and are conservative in their
habits in regard to changing long-established methods, and hence
adhere to the old way of using the actual coin or bank notes.
FRENCH BANKING. 177
The French people, therefore, require a large amount of cash
for the transaction of their daily business, and accordingly we
find that France has the largest volume of both gold and silver
as well as paper money, in proportion to the population, of any
of the great nations.
The banking of France is remarkable as an example of the
free organization of a financial system under general laws, and
without those restrictions and provisions for the safety of all
bank debts, especially circulating notes, which in other countries
has come to be regarded as essential to a stable currency.
Here is a great bank authorized to discount paper, receive de-
posits and issue circulating notes, but without any special pro-
vision for the safety of one class of liabilities rather than an-
No Special Lia- o^hcr. All liabilities of the bank are upon the
biiity for Note same footiug and equally a charge upon its gen-
circuiation ^^^j ^^^^^g rpj^^ -^^^^^ ^f England existed in this
manner until 1844, and banking in the United States was con-
ducted under the same condition up to the period of our National
Banking Act, but in both these latter countries public opinion
has required important modifications in the law for the safety
of creditors and note-holders.
CHAPTER XVIII.
ENGLISH BANKING.
BANK OF ENGLAND; PEEL'S ACT, 1844; ONE RESERVE; BANKING
AND ISSUE DEPARTMENTS.
After the industrial revolution which set in during the latter
part of the eighteenth century, England took first place, com-
mercially, among the nations of Europe, and London became the
financial capital and center of her growing commerce. As the
trade of Amsterdam declined, that of London increased, and as
wealth accumulated, England gradually became a creditor natipn,-
London as loaning and investing extensively in various parts
a Financial of the world. She is at the present time the great
creditor nation of the world, loaning through the
bankers of London large sums to foreign governments and citi-
zens. These loans and investments necessitate the return of in-
terest and dividends to the bankers of Lombard Street, in the
aggregate amounting annually to many millions of pounds.
Many of the largest transactions in the world are settled in
London, and the world's supply of gold there finds its natural
point of distribution. London has thus become, practically,
the center of the exchanges of the world, and is not inappro-
priately called the "World's Clearing House." Whether this
conditon of affairs is due to the general westward course of em-
pire and commercial development; to the freedom of the British
Isles from invasion and the ravages of war; to the genius of the
people for finance and commerce; or to the money system and the
Bank of England itself, or all of these combined, is not easy to
determine, but there are many Englishmen who would ascribe
it chiefly to the Bank of England. Certain it is, that the
Bank of England is the center around which the commercial and
monetary systems of the British Empire revolve, and the support
178
\
BANK OF ENGLAND. 179
of the whole fabric. The Bank of England, although a highly
privileged establishment, is not a government institution. It has
practically a monopoly of the note issuing power, and its notes
are the only legal tender currency of the United Kingdom. It
is the chief depository of a government which has no public
treasury. It keeps the registry of the public debt, issues the
consols and pays the interest thereon, and yet, withal, it is only
a private corporation, subject to no government inspection or
control, and managed by a board of directors who are alone
responsible to the stockholders, the same as in the case of other
corporations.
The Bank of England was founded in 1694 in very much the
same manner as the Bank of Venice — as a result of the financial
straits of the government. William and Mary were in sore need
of funds to prosecute the wars against Louis XIV. Their treas-
ury was empty and their credit weak. The increasing wealth of
the country since Elizabeth's reign had been the cause of a large
number of private banks springing up in London and other parts
of the realm, each issuing its own notes to whatever extent they
would be accepted by the public. The necessity for a great
central bank, similar to that of Amsterdam or the Italian cities,
was becoming apparent. The government desired a popular
loan of a million sterling, and William Patterson, a Scotchman,
crystallized the idea by proposing that Parliament should ask a
Origin of ^^^^ ^y pubHc Subscription, and in order to make
the Bank of the propositiou attractive, include a grant of in-
Engiand Corporation, with banking privileges to be enjoyed
by the subscribers and their successors. In this way £1,200,000
was raised at eight per cent, interest, and the subscribers were
incorporated as the "Governor and Company of the Bank of
England," with that amount as a capital.
The bank was to have the privilege of issuing notes, keeping
the accounts of the public debt, and of transacting a general
banking business, with almost a complete freedom from restraint.
180 HISTORY OF BANKING.
The entire capital was loaned to the government and thus the
bank had a revenue of nearly £100,000 at the very outset of its
career. It began at once to issue circulating notes based upon
the government securities which it held, another productive
source of income. These bills, however, were only
the°Bank^ transferable by endorsement, like ordinary promis-
sory notes, and bore interest — two conditions
which must have confined them to a very limited circulation.
Three years later the bank was compelled to suspend specie
payment, and the necessities of the government were such that
in consideration of the stockholders advancing another million
pounds to the government the bank's charter was modified. The
new charter authorized the issue of notes payable to bearer on
demand, thus laying the foundation for the present system
of Bank of England notes. It also gave the corporation a mo-
nopoly of the banking business in the kingdom by providing
that no other bank, or corporation in the nature of a bank,
should be allowed to carry on business in the kingdom. The
rate of interest on the government loan was then reduced to six
per cent. Further loans to the government and corresponding
additions to its capital were afterwards made by the bank from
time to time, until in 1722 its capital stood at nearly nine
million pounds, with a handsome surplus (called the "Rest"),
which enabled its dividends to be made uniform. In 1782 its
capital had risen to more than eleven millions and a half, and
in 1816 it had further increased to £14,553,000, or about $72,-
000,000, at which figure it has stood ever since. Its loans to the
government increased almost as its capital enlarged, but in 1834
the government paid about one-fourth, reducing the total to
£11,015,100, which is its present amount. The interest has
been reduced from time to time, until it has reached the present
rate, 2^ per cent.
The monopoly of the Bank of England, dating, as has just
been stated, from 1697, was modified in 1742 so as to permit
BANK OF ENGLAND NOTES. 181
partnerships having six persons or less to issue circulating notes,
and allow companies or partnerships of more than six persons to
perform other functions of a bank. Under this law private
banks were formed and notes were issued quite extensively dur-
ing the latter half of the eighteenth century. About the year
1772 the check system was devised and brought into use, and
proved such a convenience that many of the London banks
discontinued the issue of notes. In 1826, owing to the general
Legislation demand for better banking facilities throughout
Affecting the kingdom, and the slowness of the Bank of
the Bank England in establishing branches. Parliament
passed an act giving to companies of more than six persons the
right of issuing notes, when established at a greater distance
than sixty-five miles from London, thus limiting the monopoly of
the Bank of England in territory. Then in 1833 the law was
again amended so as to permit companies and partnerships,
although composed of more than six persons, to carry on the
business of banking in London or within the sixty-five mile
radius, provided they did not issue circulating notes. This act
was followed by the formation of numerous joint-stock banks
in London as well as throughout neighboring towns, and bank?
of issue began business beyond the sixty-five mile limit. The
London and Westminster Joint-Stock Bank, one of the leading
banks of London at present, was founded at this time (1835).
Thus matters progressed until the accession of Sir Robert
Peel to the Premiership of England, and the question of the
renewal of the bank's charter in 1844. The panics of 1811 and
1825, and the panicky conditions in 1837 and 1839, had aroused
much discussion, and public opinion was disposed to regard the
vicious note circulation which had extended rapid-
of?844^ ^^^ ^y ^^^ widely as the cause of these repeated com-
mercial crises. Prior to the act of 1844 the law
made no distinction in the bank's liabilities, the resources being
held equally as security for deposits and the redemption of cir-
182 HISTORY OF BANKING.
culating notes. Under this state of affairs, if the depositors
demanded coin to such an extent as to exhaust the reserve there
would be no coin left for the note holders, or vice versa. In
the panic of 1825 the demands of depositors reduced the reserve
to only a little more than a million pounds, while there was
yet outstanding note issues amounting to over twenty-three mil-
lion pounds. By the act of 1844 Parliament undertook to make
the notes of the Bank of England secure and limit the issue of
bank notes of all other banks in the realm. With a stable cur-
rency redeemable in gold, Sir Robert Peel believed that fear and
distrust, the bases of panics, would be banished from English
commerce, and panics would cease, and yet three years after
the passage of the act (1847) the country experienced a panic,
and ten years thereafter (1857) one of the greatest financial
panics ever known shook the English banking and commercial
world from center to circumference, to be followed in 1866 by
still a third panic of intense severity.
By the act of 1844 the bank was*divided into two depart-
ments, viz., the banking department and the issue department.
The former was to perform the functions of ordinary banking,
such as receiving deposits, discounting paper, selling or buying
exchange, etc. The latter was charged with the exclusive issue
and redemption of circulating notes. These two departments
of the bank were to be kept as separate and distinct as though
they were two independent corporations. The issue department
Division into ^^^ required to hold either government securities
Two Depart- or coiu or bullion for all notes issued by it, and
since the original provision limits the amount of
the securities to £14,000,000, it follows that all notes issued
above that amount must have an equivalent of coin or bullion in
the vaults of the Bank. Of the £14,000,000 in securities £11,-
015,100 due by the British government formed a part. The act
also provided that the Bank might hold silver to the extent of
one-quarter of its gold, and issue notes against such holdings,
"PEEL'S ACT" OF 1844. 183
but this was never done. By another provision of the act,
should any other bank, issuing notes at the time of the passage of
the act, discontinue such issue, the Issue Department of the Bank
of England might increase its holdings of securities to the amount
of two-thirds of the issue of said retiring bank, and issue its
own notes against such securities. By this means the Bank of
England will eventually become the exclusive bank of issue, for
one by one the joint-stock banks discontinue their issues, and
cannot resume them, the privilege passing directly to the Bank
of England.
The amount of securities held by the issue department against
which notes may be issued by the bank has been increased from
time to time by the discontinuance of note issues by other banks,
until it amounted in 1900 to £17,775,000, and the amount of
notes issued against gold coin or bullion on hand amounted to
£27,116,000, making a total of outstanding circulating notes
£44,891,000. It will thus be seen that the issue department of
the bank is simply an establishment for the exchange of notes
Bank of ^°^ bulliou or bulliou for notes. Every Bank
England of England note outstanding is practically a gold
certificate, since the bank has gold on hand to pay
on demand every note that it has put in circulation, except the
comparatively small portion of the reserve represented by the
debt, and which is partially covered by the bank's surplus. These
notes are a legal tender, as long as the bank is able to redeem
them in gold. By thus keeping a redemption fund of gold in
the bank vaults sufficient to actually redeem the notes in circu-
lation, the element of credit is entirely taken out of the circulat-
ing medium of the United Kigdom, and the note holder knows
that he can get its face value in gold at any moment. This
stability of the currency, it was believed by the supporters of the
Peel Act, would banish all fear from the minds of note holders
and prevent the hoarding of gold. Since the hoarding of money
through fear partially causes panics by making loanable capital
184 HISTORY OF BANKING.
scarce, it was contended that when the motive to hoard was
destroyed panics would cease.* But the panics of 1847, 1857 and
1866 were not prevented by the stability of the currency, and
in fact the panic of 1866 was only allayed by the announcement
that the Bank of England had authority from the government
to issue notes in excess of the redemption fund on hand. On
the worst day of the panic. May 11, 1866, called "Black Friday,"
the bank found its reserve in the Banking Department reduced to
nearly £3,000,000 at the close of business. That evening the
chancellor of the exchequer recommended that the bank act be
suspended, and this was promptly done by the government. The
announcement on the following morning that the Bank of En-
gland had authority to issue notes beyond the limit to whatever
extent was necessary, quieted the fears of the people, and affairs
returned to their normal condition.
Ordinarily the banking department has no power to borrow
of the issue department. It may take notes to the issue depart-
ment and exchange them for gold or vice versa, the same as
outside persons, but during each of the three panics, viz., 1847,
1857 and 1866, the government suspended the bank act, and
permitted the banking department to borrow notes from the
issue department without depositing gold in exchange. No doubt
the knowledge of the fact that this has been done in the past
and will be done again in case future emergencies require it,
will have a strong tendency to prevent panics in future.
This suspension of the banking act in case of panic or great
emergency is the only elasticity of the English currency.t At
*Fear is not so much a cause of panics as one of its pronounced features,
and the hoarding of money through fear intensifies the alarm by depleting
the cash reserves in the banlis, and by destroying their lending power for
the time being, malies "loanable capital" (which may be actual money, and
may be only bank credit) scarce.
tThe suspensions of the bank act under stress of emergencies show the
unsoundness of the theory or "principle" upon which it rests. Only a
currency based on credit can have elasticity. Credit can both stretch and
contract; money cannot, though its volume may vary both actually and
relatively in any country, nor can it be made to respond automatically to
the needs of the hour.
BANK OF ENGLAND. 185
all other times there is no expansion to it whatever. Not a note
can be issued without the gold is deposited in place of it, and
hence the total volume of Bank of England notes in circulation
in the kingdom is dependent upon the amount of gold in the
vaults of the issue department of the Bank of En-
S^e cu^en^y gland. Then again, the system has been criticised
on account of the large amount of gold which is
kept constantly locked up and idle, while it is claimed that a
safe and conservative reserve could be maintained and still re-
lease several million pounds of gold now in the vaults which
could be turned into circulation and productive use. The de-
fenders of the system say that the act prevents the over-issue of
notes, which would be a greater injury than the loss of the use
of a portion of the gold reserve, and furthermore that the gold
is the property of the holders of the bank notes, who have ac-
cepted the notes on condition that they could return them to the
bank and receive gold for them at any time. The statement of
this department of the bank May 20, 1903, was:
ISSUE DEPARTMENT.
^^ ^ X X J. ( Government debt £11,015,000
J^f^r "^^ i other securities 7,159,900
' ^ ( Gold coin and bullion 33,407,405
Besides the Bank of England notes there is a large amount of
gold and silver in circulation in the United Kingdom, necessi-
tated by the fact that the Bank of England does not issue notes
for less than £5. The Scotch banks are allowed to issue notes
for £1, and a large portion of this circulation is in small denomi-
nations.
The sources of profit of the issue department are not exten-
sive nor numerous. The government pays 2J per cent, interest
on its debt (£11,015,100), and interest is received on the other
securities which the bank holds. In addition to this the bank
makes a profit on the purchase of foreign coin and bullion
186 HISTORY OF BANKING.
brought to it, as it buys gold at the legal price of £3.17s.9d. per
ounce, and turns it into the mint at a profit of IJd. per ounce.
The bank also derives a considerable profit from the destruction
of bank bills. Any bill which is not presented at the bank
counter in forty years is considered lost and credited to the profit
account.
» V
CHAPTER XIX.
ENGLISH MONEY SYSTEM.
BANK OP ENGLAND; IMMENSE RESPONSIBILITY AS KEEPER OP
THE RESERVE; BANK RATES; MANAGEMENT.
The banking department of the Bank of England is sub-
stantially the equivalent of an extensive banking house, with all
banking functions except that of issue. It receives deposits, dis-
counts commercial paper, loans on collateral and buys and sells
exchange precisely the same as any other bank. In addition to this
it acts as the banker of the government, in the management and
payment of interest on the public debt, the issue and withdrawal
of Exchequer bills and bonds, the issue of government loans,
and all other financial operations affecting the government.
Like other banks it must as a matter of ordinary
Depsu'tmenf prudeucc keep on hand a cash reserve against its
liabilities. It is bound to meet all its demand lia-
bilities in cash, consisting of notes or coin, like other banks, and
if it has need for a greater quantity of notes than that on hand, it
may procure them from the issue department in exchange for
gold the same as any other bank.
Every deposit bank must retain constantly on hand, or
within easy reach, a sum of legal tender money, equal to a safe
and proper proportion of its liabilities, in order to meet unex-
pected demands of depositors. This is a universal rule the
world over, and is based upon the supposition, which experience
has shown to be generally true, that all depositors will not call
for their deposits at the same time, but under disturbed con-
ditions, an unusual number may make such demands, and the
bank must at all times be in readiness to meet such calls. This
187
188 HISTORY OF BANKING.
reserve is the safety fund over and above the daily requirements
of cash to transact the ordinary volume of business, held by the
bank to meet extraordinary and infrequent de-
Reserve mands. The banks all over England keep their
reserves in London. The same reasons which in-
duce a merchant to keep a bank account, viz., convenience, safety,
etc., act as incentives to a bank to deposit its reserve in whole
or in part with another bank or banker. In order to conduct
exchange transactions and have facilities for rediscounting time
bills, every bank and banker in the United Kingdom, not located
in the metropolis, find it necessary to carry an account with
some London bank or banker, and as the latter, as well as the
bill brokers of Lombard Street, who are really bankers under
another name, allow interest on such deposit accounts, the result
is that practically all of the reserve of the country is carried in
these accounts. "Owing to the fierce competition for practical
profits,"* nowhere more severe than in the field of banking, the
London joint-stock and private banks maintain no coin reserve
of their own, but deposit with the Bank of England all cash
not needed for ordinary transactions from day to day. The
Bank of England does not pay interest upon these deposit ac-
counts but the willingness of smaller banks to place their re-
serves in the Bank of England is due to the fact that they are
relieved of the care and risk of such large sums, and by showing
their funds in their balance sheets thus deposited they command
public confidence. Another reason is that the London clearing
house settlements are made through the Bank of England, which
practically compels the members of the clearing house to keep
their reserve cash with that institution. The Scotch and Irish
banks keep their surplus money in London. A portion of it is
loaned out or invested in securities and the remainder deposited
in the Bank of England. It will thus be seen at once that the
Bank of England holds not only its own reserve, but the reserve
*Conant, Modern Banks of Issue, p. 130.
ENGLAND'S BANK RESERVE. 189
of all London, and not only of all London but of all England,
Ireland and Scotland.
This great responsibility of the Bank of England makes it
the basis of the credit system of the kingdom. Upon the manage-
ment of the Bank of England depends the solvency or insolvency
of England, for all business is dependent upon the banks, and
all banks are dependent upon the one great bank, "The Old
Lady of Threadneedle Street." While the Bank of England is
Immense ^ private corporatiou carried on for the benefit of
Responsibility its stockholders, who aloue share the profits and
direct its management, it is in a sense a public in-
stitution, for to it is confided the safety of the commercial
public and credit of the kingdom, and it is morally bound in
time of stress to sustain the entire financial fabric.
There is no law requiring the bank to maintain a stated re-
serve in proportion to its liabilities, and since the management
is expected to earn as large dividends as possible for the stock-
holders, the tendency would naturally be to reduce the volume
of idle cash to the lowest point consistent with safety. Like
other banks, the Bank of England loans out a portion of its
deposits, consisting largely of reserves of other banks, and the
effect of this is to cause the reserve to be much smaller in pro-
portion to the liabilities of all the banks than it would be were
each bank to hold its own reserve. But the fact that under
the English system the bank reserve is reduced to a compara-
tively small proportion of the liabilities is not the only objection
which can be, and often is, urged against it. This reserve, all
important as it is, is given over to one board of directors, and
upon their wisdom its control depends. If they
One Reserve commit iudiscretions the entire financial and com-
mercial system may be seriously injured. Having
a smaller balance to meet liabilities, any error in the manage-
ment of that balance becomes proportionately serious.
The natural method would appear to be that each bank
190 HISTORY OP BANKING.
should keep its own reserve. Each would then be most anxious
to keep a sufficient reserve, because its own life and existence
would depend upon it. The reserve of the entire country would
then be guarded and controlled by the total banking
Many Reserves wisdoui of many boards of dircctors, and the loss of
interest occasioned by the amount of dead capital
locked up in the banks as reserves, would be more than offset by
the added security. In no other country than England could the
one reserve system exist as it does there. The system was not
deliberately founded there, but grew up as a consequence of many
events. As the system grew, confidence in the bank also grew,
until the stability of the bank is beyond question and supports
the system of one reserve. It is the absolute faith of the people
in the stability of the Bank of England that takes the place of
a large reserve.
But the reserve in the Bank of England is subject to a still
further strain occasioned by the necessities of foreign commerce.
London is the center of English commerce, and in case the
balance of trade* goes against England and in favor of any other
country, that balance must be paid by London, and this is
equivalent to saying that it must be paid by the Bank of En-
gland. When, during our civil war, the supply of cotton to
England by the United States was cut off and exports to America
greatly reduced, immense sums of money had to be sent to
Australia and Egypt to pay for cotton to keep the looms of
London the Manchester supplied. Of course no foreigner can
Clearing House take away the cash of England without giving a
of the World yalue thercfor, but that value may be in produce
or manufactures, represented by bills of exchange which the
foreigner discounts in Lombard Street, and then he may
♦The phrase "Balance of Trade" is usually taken to mean the differences
between imports and exports of merchandise, but strictly the balance is
caused quite as often through movements of capital in the form of loans
or investments, as of merchandise. These movements not being "visible"
through tlie records of the custom houses, are often very diflacult to follow.
WOKLD'S FINANCIAL CENTER. 191
take away a part or all of the proceeds of his bills in bullion.
No other city in the world cashes as many foreign drafts as
London. No other city in the world receives as many remit-
tances or pays as many drafts as London. No other city holds
as much foreign money on deposit as London, for wherever the
people have payments to make, at that place they must keep
money on deposit. Formerly Paris was a European clearing
house to a considerable extent, and divided the business and
responsibility with London, but the changes in government in
France have had the effect of greatly reducing the confidence of
foreigners in the stability of the Bank of France, while the
volume of mercantile business finding its natural settlement in
London compelled banks all over the world to keep accounts
there. As it is more convenient to keep one foreign account
than several, and most convenient to keep this in the city with
which transactions are largest and most numerous, there was
thus placed upon merchants all over the world the effective
pressure of more favorable exchange rates when bills could be
drawn upon and payments made in London. Very large banks
can keep accounts in all the European centers, but it would
neither be profitable nor possible for small banks to keep such ac-
counts, because of the amount of cash that would be locked up.
Moreover the most favorable terms can be obtained upon large
accounts only, and it is a custom, the world over, except in the
United States, for banks to exact commissions on all services
rendered. These considerations have tended to centralize the
financial transactions in the Bank of England,* which has
established a record for stability and uniformity of dealing
through long generations.
As the commerce of a nation increases the reserve on hand
♦When the volume of exchanges on some other city, New York, for ex-
ample, becomes so great relatively, that banks the world over find It cheaper
to effect settlements there rather than in London, the prestige of London
must surely begin to wane. There are other factors in the case, however,
such as the amount of free capital available for discounting time bills of
exchange, etc., but the foregoing is the chief one.
192 HISTORY OF BANKING.
to settle the balance of that commerce must likewise increase.
A single bad harvest in any important country with which
England trades, may seriously affect the balance of trade with
England, by reducing the demand for English manufactures. A
sudden increase of imports or a cessation of exports causes a
A Reserve for balance of trade to become due, which must be paid
Foreign in bulliou. Within a country, paper currency may
Payments ^^ ^^^^ ^^ Settlement of obligations, but in inter-
national trade the only cash is metal. The Bank of England
must therefore keep a reserve which can be used for foreign
payments either in bullion or legal tender notes which can
be converted into bullion on demand by passing them over the
counter of the issue department. The requirements of foreign
commerce are often sudden and fluctuating, and must be met
promptly. Therefore it is of the greatest importance that the
reserve upon which this commerce depends should be both
ample and ready, at all times, to satisfy the demands upon it.
Foreseeing the need for an increase in the reserve in anticipa-
tion of large foreign payments, soon to be made, the question at
once arises, "How are the bank directors to secure the additional
bullion?" They may reduce the volume of discounts, and this
would in a measure help to accomplish the purpose, but would
not afford a sufficient increase in the reserve to meet a large or
continuous drain on the reserve. They may sell securities, but
in a very large number of instances this would merely mean the
transfer of a credit from one account to another on the bank's
ledger, as the buyer of the securities would in all probability
be an individual or bank having a deposit account with the Bank
of England. What then is the means employed to increase the
reserve? The answer is, raising the rate of dis-
msLunt count. If the directors of the Bank of England
vote to raise the rate of discount, it is proved by
experience that money flows to Lombard Street and from the
other banks it flows to the Bank of England. Money (i. e. capi-
FOREIGN SETTLEMENTS. 193
tal) goes where it is wanted most and commands the highest rate
of interest.
An increase in the bank rate has an immediate effect on
foreign exchange transactions, making it unprofitable, or tending
to make it unprofitable, to withdraw gold for export, and at the
some time tending to make it profitable to ship gold from other
financial centers to London. The bankers there pay a higher
rate of interest and charge borrowers a higher rate of discount.
The effect of the operation of raising the rate of discount even
slightly is to swell the reserve in the vaults of the Bank of
England, and at the same time to diminish loans by discouraging
borrowers. With money a little "tighter," imports are dimin-
ished and exports are increased, thus tending to change the bal-
ance of trade in England's favor and reduce the necessity for
large foreign payments. The raising and lowering of the rate
of discount by the directors of the Bank of England, then, acts
as a lever of control to the financial and commercial systems of
England. When the bank is "flooded" with money, and no
prospects are visible of a drain upon the reserve, the rate of dis-
count is lowered. Money now flows from Lombard Street into
other channels both in England and on the Continent, where it
can be more profitably employed; with a lower rate of discount,
borrowers are more plentiful, and more goods are imported.
Many persons believe that the Bank of England has some
peculiar power which enables it arbitrarily to fix the rate of in-
terest, whereas the truth is the bank merely gives expression to
the market value of money, as fixed by the laws of supply and
demand. The value of money is settled, like that of all other
Effect of commodities, by the inexorable law of demand and
Supply and supply, and the bank merely takes the lead in fix-
Demand .^g ^^ establishing that value in the form of a
discount rate. If the bank vaults are full, the bank lowers the
rate to attract borrowers, the same as a merchant lowers the
price of his goods in order to effect sales and reduce his stock.
194 HISTORY OF BANKING.
and the contrary policy is pursued to increase the cash in the
bank vaults.
The government of the Bank of England is confided in a
board of twenty-four directors, a governor and a deputy gov-
ernor, who each serve one year. In theory a portion of the di-
rectors go out annually, remain out for a year and are then
subject to re-election, but as a matter of fact they are nearly
always re-elected at the end of the year, unless other members
of the board oppose. All the directors in turn serve as deputy
governor and governor, in rotation, and it is not until a director
Management ^^^ ^^^^ ^P°^ ^^^ board perhaps twenty years
of the Bank that he succccds to the position of governor.
of England ^Theu a vacaucy occurs in the board by death or
resignation, the directors usually select some promising young
business man for the place. In order to reach the governorship
within the period of a lifetime, it is necessary that new directors
should be young men. The position of director of the Bank of
England is considered a highly desirable one, as it gives a con-
siderable status to both the individual and the house to which he
belongs. By a long-established usage the directors cannot be
connected with any other bank, in any official capacity. They
must be merchants, brokers or capitalists of experience, and
men presumed to possess information as to the present and future
course of trade. The reason for the discrimination against bank-
ers as members of the directory of the Bank of England no doubt
arose out of the narrow-minded jealousy of former times, which
regarded all other banks as rivals to be feared and opposed.
In theory the system of management of the Bank of England
would seem to be very objectionable. A governor, the chief
executive officer of the bank, allowed to hold the office but one
year, a directory made up of merchants, a portion of them young
men, and not a trained banker in the entire board,* would not or-
♦There is no better school for the education of bankers in the larger lines
of their profession, in a firm grip on guiding principles and a wide outlook
over the whole commercial and financial world, than service. on the board
MANAGEMENT. 195
dinarily be regarded as a very competent or safe board. Indeed,
were such a system of management proposed at the present time
for the conduct of a new and important banking house in En-
gland or elsewhere, it would instantly be rejected as crude if
not absurd. And yet the Bank of England, which holds the
nation's reserve, is managed in this way. Banking is now re-
garded as a profession to which men should be trained by years
of constant experience and familiarity with financial questions.
And yet the Bank of England has been singularly well managed.
Its directors have always seemed to appreciate the large re-
sponsibility resting upon them, as managers of the bank which
sustains the credit system of England, and while at times they
have erred in policy the great institution stands to-day as solid,
in the estimation and confidence of the people, as the government
itself.
of the Bank of England. As nearly all of the board have been many years
in office, they are as a lot, men of ripe experience, and as the new men
are always in the minority and are constantly being educated by their en-
vironment and responsibilities, a tremendous force is thus developed in the
line of conservative action. Technically they may not be bankers; prac-
tically they are very good ones.
CHAPTER XX.
GERMAN BANKING.
REICHSBANK; ELASTICITY OF GERMAN CURRENCY; STABILITY;
RUSSIAN BANKING.
Prior to the unification of the German Empire in 1871 each
state had its own banking system, and most of the banks were
allowed to issue notes according to certain restrictions and upon
such bases as the states and cities establishing them should
prescribe. These banks differed materially as to the limit of
their authorized issues, and were bound to a great variety of
restrictions as to their requirements of a reserve. Under this
German Bank- statc of affairs uotcs wcrc currcut only in the
ing before the state whcrc they were issued, and trade was
Empire scriously hampered for want of a stable and uni-
form currency. The coinage law of 1871 undertook to establish a
uniform monetary system throughout the empire, and paved the
way for the adoption of the gold standard in 1873. In 1874 a
law was passed abolishing the different issues of paper money
then current throughout the different states of the empire and
substituting therefor imperial bank notes convertible into gold.
The new currency was distributed to the states to the extent
of 180,000,000 marks. Finally, in 1875, all banks of issue
throughout the empire were brought under a uniform law, and
made a part of the system of imperial finance, thereby greatly
improving and facilitating trade and commerce.
Under this system the Bank of Prussia became the Imperial
Bank of the empire, with a near approach to a monopoly of the
note issuing power and the same system for the gradual abolition
of the issues of other banks and the final concentration of the
power of issuing circulating notes in the Imperial Bank as is
196
THE REICHSBANK. 197
possessed by the Bank of England. The capital of the Imperial
Bank (Reiehsbank) is 120,000,000 marks, divided into shares of
3,000 marks each, and is all owned by private in-
Reichsbank dividuals. Unlike the Bank of England, the
Reiehsbank is subject to governmental control. Its
affairs are managed by a president and board of directors named
by the government, subject to the chancellor of the empire, or a
substitute named by him who has entire charge of the bank, and
directs its policy. The stockholders of the bank have no voice
whatever in its management. They merely furnish the capital
and divide the profits of the institution. As a matter of fact,
however, the stockholders do not receive all of the profits. In
case the net profits exceed 3J per cent., then the government
becomes a sharer in the profits above that limit.
The German system of note issues rests upon a mixed basis
of securities and specie, somewhat similar to that of England,
with the important difference that the law contents itself with
requiring the maintenance of this basis, without specially pledg-
ing or setting apart specific coin or securities for the purpose,
as is done by the Issue Department of the Bank of England.
German currency is secured by the salutary power of the law
rather than by specific property, and to make sure
Loans*^ °^ ^^ ^^^ obscrvaucc of the law, all banks of issue
are required to report the condition of their note
issues every week to the chancellor of the empire. No precise
limit is fixed for the aggregate circulation of the notes of the
Reiehsbank and other banks of issue, but the total of notes which
can be issued without being covered by cash in the vaults of the
banks is 385,000,000 marks, of which 250,000,000 marks are
allowed to the Reiehsbank and 135,000,000 marks are appor-
tioned among the other banks. For all notes issued by any
bank beyond its limit, the government requires that cash shall
be held to the full amount of such issue, the term "cash" here
meaning German and foreign gold, bullion, imperial treasury
198 HISTORY OF BANKING.
notes and the notes of other banks. But if any bank issues
notes beyond the limit and not covered by cash a government
tax of 5 per cent, is imposed, thus taking away the profit, and
hence the inducement to such extra issue. In case the weekly
report of any bank shows that its issue exceeds the limit as above
explained, a tax of 5/48 per cent, is charged, this being the rate
for one week at 5 per cent, per annum. The law requires in
any case, however, that the cash held, exclusive of the notes of
other banks, must equal not less than one-third of the total
note circulation, and that the remainder shall be protected by
good assets, usually consisting of securities or discounted paper
having not more than three months to run and bearing two
solvent names. The note issues of Germany thus rest upon a
mixed basis of specie and other assets.
As previously stated, the legal limit of note issue without
specie reserve may be exceeded upon payment of the government
tax of 5 per cent.. This is an important feature of the German
system, since it gives an elasticity to the currency of the empire.
In a time of stringency, the rate of discount goes
Se Currency above 5 per ceut., and then the banks can make an
issue beyond the limit, loan the funds at the ruling
rate of discount and have a profit left after paying the govern-
ment tax of 5 per cent. But the moment the money market
loosens and the rate of discount falls below 5 per cent, the
banks can no longer afford to loan out funds at a rate which
is lower than the tax which they must pay to the government,
and hence the extra circulation is retired. By this system the
volume of the circulating medium adjusts itself to the needs of
the country. This automatic contraction and expansion has been
of great benefit to the commercial interests of Germany. In this
way financial stringencies have several times been relieved and
probable panics averted.
The currency of Germany is kept on a gold basis by the
Imperial Bank, which is required to redeem its notes on demand.
BANKING RESERVES. 199
While the notes are not issued against a specific reserve, as in
the case of the Bank of England, but against the general assets of
the bank, and are not even a prior lien on those assets, never-
theless a sufficient supply of gold is carried in the vaults of all
the issuing banks to place the redemption of the notes beyond
doubt in the minds of the people. In 1899 the
Gold Basis total volumc of circulating notes outstanding in
Germany amounted to 1,322,208,000 marks, and
the total metallic reserve held by the eight banks issuing these
notes was 911,528,000 or a little less than seventy per cent.
Bank notes in Germany are not issued in lower denomina-
tions than 100 marks, and this restriction keeps in constant
circulation a considerable quantity of specie for small trans-
actions. The bank notes are not a legal tender, but their credit
is maintained by their convertibility at all banks of issue. By
means of an extensive system of branches of the Eeichsbank scat-
tered throughout the empire, the system of deposit banking is
becoming quite popular, thus reducing to a certain extent the
use of bank notes in the transaction of business. A large number
of joint stock banks located in Berlin and other prominent
cities of the empire have been organized, and materially assisted
in furnishing banking facilities to the people and educating the
masses in the utility of deposit banking. These joint stock
banks, as a rule, carry their reserves in the Reichsbank, that
institution being the safest and most convenient
ReMr^es*^ storchousc of gold in the empire. Thus it will be
seen that these banks sustain very much the same
relation to the Reichsbank that the joint stock banks of London
do to the Bank of England. The policy of the management of
the Reichsbank has been to guard well these reserves by a large
supply of gold in the vaults, so as to protect the credit system of
the empire by establishing perfect confidence. Like the Bank
of England, the Reichsbank resorts to the scheme of raising
or lowering its rate of discount to protect its reserve, raising
200 HISTORY OF BANKING.
its rate in times of danger and lowering it in times of peace
and plenty.
In order that the action of the Reichsbank may virtually
control the money market, the law forbids all other banks of
issue to discount at a rate lower than that of the Eeichsbank
when its rate is as high as four per cent. Thus when the
Eeichsbank raises its rate to or above four per cent, all of the
banks of issue are compelled by law to do the
Controls other ^^^^ ^^^^ ^^^ Rcichsbank lowers its rate below
Joanks
four per cent, the other banks are allowed to
discount at a rate of one-fourth of one per cent, lower than the
Eeichsbank rate. Were it not compulsory on other banks to
follow the rate announced by the Eeichsbank, business would
merely shift from one bank to another and the general situation
would in no way be affected or improved. The Eeichsbank has
about three hundred branches scattered throughout the empire
and with the influence of these in addition to the banks of
issue the rate of discount as established in Berlin by the
Eeichsbank is easily maintained and made to control the price
of money throughout the empire.
In addition to the specie and bank notes in circulation in
Germany the government has notes of its own in circulation. An
imperial "war chest" is kept in which is stored a large reserve
Imperial ^^ S^ld as an emergency fund to be used in time
Treasury of war. This fuud is estimated at 150,000,000
marks, and in order to prevent so large an amount
of cash from lying idle, an issue of imperial treasury notes for
an equal amount is put into circulation. These notes are really
gold certificates, since they merely circulate instead of the coin.
EUSSIAN BANKING.
The Imperial Bank of Eussia was established in 1860 with
a capital of 25,000,000 roubles. It is wholly a government in-
stitution, controlled by the Czar, and has no connection what-
CIRCULATION AND REDEMPTION. 201
ever with private individuals, except to the extent of its daily
business transactions. It thus partakes of the imperialistic
character of the government in a decided degree. As has been
expressed by one economic writer, it "is as if we
orRussL^*"^ had a bureau in the Treasury Department with
power to do a great and varied banking business
and with branches all over the country." Unlike the Bank of
England, the Bank of France, or the Reichsbank of Germany,
which are formed by means of private capital, the Imperial
Bank of Russia is merely the Russian Government engaged in the
banking business with its own capital and for its exclusive
profit. In 1896 the capital of the bank was increased to 50,-
000,000 roubles. It issues the paper money of the empire ex-
clusively. The issue and the commercial banking departments
are kept entirely separate, upon practically the same plan as
that followed by the Bank of England.
Paper money is the actual medium of exchange in Russia.
Notes are issued in denominations of 100, 25, 5, 3 and 1 roubles
and are full legal tender. Specie payments have been suspended
since 1855. The paper rouble is worth 66^ copecks, there being
100 copecks in a rouble. The authorized circulation of paper
currency based upon the credit of the govern-
circuiation mcut is 769,342,911 roubles. This is fiat money.
Above this the note issues, if any, must be covered
by the deposit of an equal amount of coin. The total circulation,
both covered and uncovered, is about 1,100,000,000 roubles,
and the metallic cash in the bank vaults is in the neighborhood
of 700,000,000 roubles, of which less than twenty millions are
in silver.
Although the bank holds what is called a redemption fund,
there is no provision made for the redemption of the notes. The
stock of gold which is held is merely for the purpose of estab-
lishing confidence in the minds of the people, preventing fluctua-
tions or depreciation of the paper currency and holding the
202 HISTORY OF BANKING.
value of the paper at a fixed rate in proportion to gold. Under
this policy the rouble has been practically stationary in value
during the past ten years, and its value has been
Redemption fixed by exchange at 66f copecks, or, one gold
rouble as equivalent to one and one-half paper
roubles. The paper currency is thus given a fixed value and
the two roubles — paper and gold, circulate side by side at the
agreed value of three to two. The government has accumulated
its gold reserve by retaining most of the gold product of the
Eussian mines in recent years.
The commercial banking department of the Imperial Bank
of Eussia exercises all of the ordinary functions of a bank of
deposit. By means of its one hundred branches scattered
throughout the empire, the Imperial Bank has been able to
reach the people and supply needed banking facilities in a fairly
satisfactory measure. The policy of the present Czar is to de-
commerciai vclop the almost limitlcss resources of the country.
Banking and to this end the government, through its bank,
epartment ^^ ^^^^ liberal in making loans, frequently taking
risks which would not be regarded as safe according to the usual
rules of credit. The government no doubt is willing to take
some risks for the sake of the general betterment of the country,
and it can afford to make unusual loans since it has extraordinary
power to punish delinquent debtors.
Loans for development purposes are regarded with especial
favor by the loan department of the bank, since new industries
in all parts of Eussia are much desired by the Czar. Agricultural
loans are a prominent feature of Eussian banking.
Loans These consist of loans made to small farmers upon
a pledge of their products, or the guarantee of
individuals who may be regarded by the bank as trustworthy.
Loans are also made to mechanics and manufacturers upon
pledges of their products. In both this and the agricultural
class of loans the property pledged remains in the possession of
LOANS. 203
the producers, and the loans are made for long terms — until the
products can be marketed. This system results in some losses
to the government, but the general benefit to the country by
stimulating industry is believed by Eussian statesmen to more
than compensate for the percentage of losses.
It will be seen from the foregoing description that the Russian
banking system is not a complicated one, since no private capital
or individual management is involved. Its volume of circulating
medium is dependent upon the will of the government, and is
limited only by the amount which will circulate without serious
depreciation. As previously stated the paper currency is worth
but 66^ per cent, of gold, but the government aims to hold it
at this point. This can only be done by strengthening the gold
reserve, and the financial policy of the government is to do
this. In case of hard times the government increases the volume
of money sufficient to slightly raise prices and stimulate produc-
tion. This is the elasticity of the Russian system of currency.
CHAPTEE XXI.
SCOTCH AND CANADIAN BANKING.
SCOTCH SYSTEM; BRANCH BANKS; CANADIAN SYSTEM;
ASSET BANKING; ELASTICITY.
Banking in Scotland is conducted upon a system resembling
in many respects the English, and yet differing from it in
several important particulars. There are ten banks of issue, each
of which has many of the privileges of the Bank of England,
but without the monopoly which the latter possesses in England
and Wales. These ten banks are strictly private institutions,
but are allowed to issue notes after the method of the Bank of
Organization England. The act of 1845 regulating the banking
of the Banks System of Scotland, fixed the volume of authorized
of Scotland ^^^^ -gg^^g ^^ ^^j ^^^ ^^^^^ ^^ £3,087,209, which,
however, has since been reduced by the suspension of two banks
to £2,676,350. All note issues above this amount must be fully
covered by coin, one-fifth of which may be silver. The circula-
tion on June 30, 1900, amounted to £7,903,000, and in addition
to this, Bank of England notes circulate extensively in Scotland.
A large portion of the circulating bank notes of Scotland are in
denominations of less than £5, while the Bank of England notes
are all of £5 or upwards.
May and November in Scotland are the seasons for making
the regular semi-annual settlements. Interest on mortgages is
then collected, and annuities are received. The country folk
draw the interest on their bank deposits, and there
Elasticity is a general liquidation throughout the country re-
quiring an additional volume of currency. The
banks are then pressed to enlarge their circulation, and in order
to do this they must in some cases bring specie from the
Bank of England, the great storehouse of cash for the United
204
SCOTCH SYSTEM. 205
Kingdom. After tlie drain is over the circulation falls to its
normal volume and the boxes of gold are returned to London,
without, in many instances, having been opened. The elasticity
of the currency would be much greater were it not limited by
the requirement of the coin deposit, but safety in Scotland, as in
England, is preferred to elasticity, and the quality of safety is
so great that the people prefer bank notes to gold.
A novel feature of the Scotch system is the cash credit
accounts, by which a customer whose account is secured by the
guarantee of two friends, is supplied with funds from time to
time as he needs it to the agreed limit. The system practically
amounts to the granting of permission to firms or individuals
to overdraw their bank accounts to a certain ex-
AccoJiTs*^'* tent. The design is to furnish a working capital
to tradesmen and farmers, especially those who
are possessed of good character but with little means. The custom-
er is only charged interest from day to day on the amount which
he actually draws under his cash credit and his deposits go to re-
duce the amount of such interest. The difference between this
arrangement and the usual way of covering the loan with a note
is that the daily deposits of the customer reduce the interest
charge and the bank has control of all sums not in active use.
Scotland has eleven banks and these have 1,077 branches.
Nowhere else is the system of branch banking so extensively
carried on, a feature scarcely known in the United States.
Scotland has one bank or branch bank to every 4,000 of popula-
tion against one to about every 10,000 in England, and one
national bank to nearly every 20,000 people in the United
States. With a population of only a little over
Branch Banks 4,000,000 Scotland has bank deposits of £103,674,-
000, or nearly £26 per capita. This speaks well
for the thrift of the people and may be attributed in a large part
to the diffusion of branch banks into every corner of the public
domain. In the early history of banking in Scotland a low
206 HISTOEY OF BANKING.
rate of interest was paid by the banks on current deposit ac-
counts. This no doubt stimulated habits of saving and thrift
among the people and taught them to use the banks as de-
positories for their funds. Gradually the interest was reduced
and finally abolished on all but savings accounts, with little or
no diminution of the number and size of the depositors' accounts.
Governed by a head bank, the expense of conducting the branches
is comparatively small, amounting on an average to not more
than l-J per cent, on the deposits, and thus with the economy
of resources afforded by the system, the eleven institutions
produce earnings which enable them to pay dividends of 8 to 15
per cent, per annum.
THE CANADIAN SYSTEM.
Prior to the consolidation of the various provinces into the
Dominion of Canada, in 1867, a number of the largest banks
issued circulating notes under permission of their respective
provincial governments, but after the consolidation, only banks
authorized by the general government were permitted to issue
notes. The present banking system of Canada somewhat resem-
bles that of Scotland, and possesses some excellent features,
among which is its system of "asset currency" with its very
desirable quality of perfect elasticity. In 1870 a law was passed
requiring all banks of issue in the dominion to have a paid up
capital of at least $250,000, and restricting the note issue of
each bank to the amount of its paid up capital. In 1891 the
banking act was amended and the capital stock limit of issuing
banks was raised to $500,000, of which one-half must be paid
over at the time of organizing the bank, to the minister of
finance, to be held by him until the organization is complete and
all details of the law have been complied with. He then pays
back to the bank the amount so deposited, less five per cent, of
the capital, which is retained as a guaranty fund, to be used
in the redemption of notes in case of the failure of the bank.
CANADIAN SYSTEM. 207
A Canadian bank may issue notes to the full amount of its
capital stock, and no reserve is required to be kept on hand as a
security for their redemption, the only provision
No Reserve of this kind being the fund in the hands of the
treasurer, composed of the five per cent, required
to be deposited by each bank of issue at its forma-
tion. Thus the notes of every bank are credit obliga-
tions based upon almost wholly the general assets of the bank,
but the law makes them a first lien upon such assets, liabilities to
the dominion government being a second lien, and liabilities to
the provincial government a third lien. In addition to this
very excellent precaution, the law imposes a double liability upon
the stockholder, making each liable for double the amount of
stock which he holds.*
No inspectors or examiners are employed by the government,
but monthly reports are made to the government showing the
condition of the bank's assets, circulation, etc., and severe pen-
alties— fine and imprisonment — are prescribed for failure to
comply with the law or the making of false returns.
Inspection The banks may also demand of each other state-
ments as to their condition at any time, and thus
the most careful scrutiny is exercised by each bank upon all of
the others as well as by the government. Since each bank in the
regular course of business has occasion to take over its counter
the notes of other banks, the care exercised against taking notes
that are not good is a wholesome restraint upon every bank,
and under the system every banker is watching the solvency of
every other. This supervision is far more thorough and effective
than that of government inspection, since bankers are not only
more capable of scrutinizing such institutions, but it is vital
to their interest to do this in the most thorough manner.
*Two banks, La Bank du Peuple and the Bank of British North America,
exist under ancient charters which do not permit of the double liability
requirement as to stockholder, and for this reason they are only allowed to
issue notes to the amount of 75 per cent, of their capital.
208 HISTORY OF BANKING.
An essential feature of the Canadian system is the fact that
the bank notes are not a legal tender, for were they possessed
of this quality, other banks would be compelled to accept them,
irrespective of the solvency of the issuing bank. They would
circulate then not upon their merits but upon the
Tender^*^ legal tender quality underlying them. Without
the legal tender quality to float the circulating
notes, each bank takes them upon the soundness of the bank
issuing them, and upon the slightest indication of weakness on
the part of the issuing bank its notes are thrown out and it is
discredited. Thus any bank may be summarily and severely
punished the moment it allows itself to get into an unsound or
weak condition.
The banks of the three financial centers of the dominion,
viz., Montreal, Quebec and Toronto, act as clearing houses for
all the banks of the dominion. Notes of any discredited bank are
immediately sent to them for redemption, and should a bank
suspend, liquidators are at once appointed to convert the assets
and redeem the circulating notes. In case the assets are insuffi-
cient for this purpose the extra liability of the stockholders is
resorted to, and should this not prove sufficient, then the five
per cent, fund in the hands of the treasurer is forthcoming for
the purpose. Should this fund become exhausted.
Liquidation the solvcut banks are assessed to make up the
difference. As a matter of fact, however, the
liquidators -are always able to redeem the notes out of the assets,
but in order that all solvent banks may accept the notes of an
insolvent bank without loss, the law provides that such notes shall
bear interest at the rate of six per cent, from the date of the sus-
pension of the bank until they are redeemed. Thus the notes
of even a suspended bank never fall below par. After the lapse
of sixty days, if the liquidators do not pay, then the treasurer
pays them out of the redemption fund.
The banks are compelled to keep their notes at par, and in
CANADIAN SYSTEM. 209
order to do this they must provide redemption agents at various
points throughout the dominion. Were it not for
Notes at Par this provision, uotes of a Montreal bank would be
at a discount when circulating in a distant prov-
ince like Manitoba, for the reason that time and effort would
be required to present the note at the proper place for redemption.
The elasticity of the circulating medium is one of the features
most prized in the Canadian banking system. This quality
of being capable of expansion and contraction according to the
requirements of trade is possessed by the note circulation of
Canada to a greater extent than that of any other in the world.
When business activity demands a large circulating medium
the banks issue their notes to meet the demand, not exceeding,
of course, the amount of their paid up capital, and when less
money is needed these notes drift back into the
uie Currency hauks in the form of deposits or in liquidation of
discounts and are thus practically retired, being
locked up in the vaults. They are not then idle capital since they
have cost nothing, except the expense of printing them. The
volume of the circulating medium of Canada often varies as
much as 15 per cent, in the course of the year. As a matter of
fact the volume of notes outstanding is usually not much above
75 per cent, of the paid up capital of the banks, thus the cur-
rency has an expansibility in case of emergency amounting to
nearly one-fourth its usual volume, provided, of course, the
assets of the bank are sound in quality. As a result of this,
rates of interest in Canada are comparatively uniform, and a
"tight" money market is unknown.*
With the currency based upon the general assets of the
bank having a priority of lien over all other liabilities, being
♦True elasticity in banlj note circulation implies automatic adjustment of
the volume to the needs of business. Heretofore the Canadian system
has worked perfectly because the banks have been able at all times to
supply all that has been needed without exceeding the maximum limit,
and that limit was so well beyond the need of the country that the banks
210 HISTORY OF BANKING.
under the surveillance of not only the government but, better
still, the entire banking fraternity, and safeguarded by the
double liability of stockholders, it is believed that the note
circulation of Canada is absolutely safe, and possesses advantages
over any other system.
The system of branch banks which prevails in Canada is not
only an advantage to the banks, but a decided convenience to
the people. Nearly every bank of any considerable size in the
dominion has a number of branches scattered throughout the
provinces, there being in all about 650 branches. Weekly re-
ports are made to the head bank, and thus the manager is kept
fully posted as to the business transacted by the branches. By
this system sparsely settled portions of the dominion are pro-
vided with banking facilities through a branch
Branch Banks bank, where the business in that particular sec-
tion would not be sufficient to support an inde-
pendent bank. The branch may be conducted in a small and
inexpensive manner suited to the needs of the community, while
it furnishes the benefits of the financial strength and solidity
of the parent institution. Then again, through its various
branches a bank is able to loan out its funds advantageously
where money is most needed. In one province there may be an
abundance of money seeking investment, with large deposits in
the banks, while in another where the work of development of
natural resources is going on, there may be a demand for
money, and small deposits in the banks. Now by transferring the
surplus funds from the one province to the other both are
accommodated, and this can be done easily and readily through
the agency of the branch bank system. Not only is the public
accommodated, but by this means the banks are able to earn
have seldom been able to push their notes out so as to raise the total
beyond 75 per cent, of the maximum. Of late, however, the rapid develop-
ment of the country without proportionate increase in its banking capital
has changed this and their issues now approximate very nearly to the
lawful maximum at all seasons,
CANADIAN SYSTEM. 211
larger dividends, in consequence of using their assets to the
best advantage. Under this system the farmer in the Northwest
is able to borrow money almost as cheaply as a resident of
Quebec.
Mr. B. E. Walker, President of the Canadian Bankers' Asso-
ciation, in explaining the advantages of the branch system,
said: "In Canada, with its banks with forty and fifty branches,
we see the deposits of the saving communities applied directly to
the country's new enterprises in a manner nearly perfect. The
Bank of Montreal borrows money from depositors at Halifax
and many points in the maritime provinces where savings largely
exceed the new enterprises, and it lends money in Vancouver or
in the Northwest, where the new enterprises far exceed the
people's earnings." As water "seeks its level" so money will
to a certain extent flow where the greatest demand for it exists
and the highest rates of interest are paid, but by means of the
system of branch banks this ebbing and flowing of the financial
tide is greatly facilitated.
A third advantage growing out of this mobility of the finan-
cial system is that a financial stringency in any part of the
Dominion can be instantly relieved by transferring funds from
any other part, thus averting what might, under other circum-
stances, become a panic or commercial crisis.
In the United States under our law there can be no branch
banks in our national banking system because every national
bank must have a capital of at least $25,000, and when a strin-
gency arises in any part of the country, the banks both there
and elsewhere usually look out for their own welfare, and money
does not flow to the point where it is needed, as under the
branch bank system.
While the law does not specifically require the banks to
carry a reserve, in order to protect their notes, nearly all of the
Canadian banks maintain a reserve as a means of demonstrating
their strength and as a practical necessity in the conduct of their
business.
312 HISTORY OF BANKING.
The Canadian government issues a paper currency called
"Dominion Notes" which is a legal tender and redeemable in
gold on demand. These notes are issued in denominations of
25c, $1, $2, $4, $50, $100, $500 and $1,000, and together with
a small proportion of silver, furnish the circulating medium
for small transactions, the bank notes not being
No™s°'°° issued in denominations below $5, and above that
amount only in multiples of five. In making pay-
ments every bank is compelled, if required, to pay small Domin-
ion notes to an amount not exceeding $100. Thus the notes
readily circulate, keeping the bank note circulating at par with
it, and the whole upon a gold basis. There is no limit upon the
issue of notes by the government, but for all over $20,000,000 an
equal amount of gold must be held by the minister of finance.
Below that amount the government reserve consists of gold
and Dominion bonds.
-\
CHAPTER XXII.
BANKING IN THE UNITED STATES.
COLONIAL PERIOD; BANK OF NORTH AMERICA; HAMILTON'S
VIEWS; FIRST UNITED STATES BANK; STATE BANKS.
Prior to the achievement of their independence the banking
facilities of the colonies were not only very limited, but crude
and unsettled. No well defined system of finance or banking had
been worked out, even in the older countries of Europe. The
Bank of England came the nearest to a settled plan, but it was in
the experimental stage, constantly changing its policy or methods
during the first hundred years of its existence. Men did not
understand finance. They were groping about, experimenting,
trying all manner of schemes and hoping to find the successful
one. The first banking experiment in this country of which
we have any reliable account was started in Boston in 1714,
and was to be a land bank, patterned no doubt on ideas borrowed
from John Law of France. This scheme was entitled "A Pro-
jection for Erecting a Bank of Credit in Boston, New England,
Founded on Land Security." The capital was fixed at £300,000,
and each subscriber to the stock was required to "settle and make
over real estate to the value of his respective subscription to
the trustees of the partnership or bank, to remain as a fund
or security for such bills as shall be emitted therefrom." At
meetings of the stockholders, each person should
Banki'ng ^^^ ^^^® moTe than five votes, irrespective of the
number of shares which he held. Loans were to
be made on "ratable estates" to the amount of two-thirds their
value; on wooden houses, not exceeding the value of the land
included with the house; on brick houses, to the extent of one
and a half times the value of the land belonging to them; "on
213
214 HISTORY OP BANKING.
iron or other imperishable commodities as a pledge, for a half or
two-thirds, according to the market." The scheme was very
popular, especially with the irresponsible class and those pos-
sessed of real estate but no ready cash, who wanted to borrow
money on easy terms. The project was vigorously attacked in
a pamphlet by Paul Dudley, attorney general, who showed that
the pretended land security for the bills was in reality no
security at all, since the holder of them could do nothing with
a mortgage if it w^ere turned over to him. He gave it as his
legal opinion that the mortgages were without consideration
and would not be enforced by the courts. When a charter was
applied for, the scheme was vetoed by the Colonial Legislature.
Next came the Land Bank of 1741, a "pernicious grand bubble,"
a scheme which convulsed society in its day and came near pro-
ducing a revolution. This bank began to issue circulating notes
without a charter. The governor issued a proclamation against
it and a general quarrel ensued. New banks now began to be
organized, in imitation of this one, in all towns of importance
and a regular banking mania broke out. The financial schemes
were projected by "a vast multitude of necessitous, idle and
extravagant persons, (who) contrived to obtain what they call
money, at an easy rate and to pay their debts in a precarious,
fallacious kind of bills, very illy or not at all secured, of no de-
termined value, bearing no interest," and payable at some in-
definite time. The situation resembled somewhat that which
had existed in England during the South Sea speculative mania,
and to bring the colonists to their senses and put a stop to these
wild schemes, Parliament extended the prohibitions and penal-
ties of the Anti-Bubble Act to the colonies. This stirred up
much antagonism and resentment in the minds of the people,
but resulted in killing the Land Bank. The liquidation of the
bank's afi'airs extended over a period of almost a quarter of a
century, and nearly every one who had any connection with the
institution was ruined.
COLONIAL BANKING. 215
During the Revolutionary War, one of the most difficult
and embarrassing problems which confronted the Continental
Congress was the money question. How to provide the means
for keeping the armies in the field was a knotty question. The
treasury was bankrupt, and Congress possessed no power to com-
pel the several states comprising the confederacy to pay their
just portion of the taxes. Congress undertook to tide over the
emergency by issuing bills of credit,* which were to pass as
currency, but as millions upon millions of these were printed,
and as the prospects of a successful termination of the war be-
came doubtful, these bills sank in value until in 1778 a dollar
During the ^^^ worth but Sixteen cents in gold. In 1780 it
Revolutionary had fallen to two ceuts, and in 1782 it required
^*' $1,000 in notes to equal $1 in gold. Different
states issued paper money at the same time which circulated at
various values. The people were poor, in debt, and discon-
tented, and general grumbling prevailed. In order to remedy this
state of affairs and bring some degree of financial order out of
the general confusion, Robert Morris, then superintendent of
finance, in 1782 obtained a charter from the Continental Con-
gress for the Bank of North America, at Philadelphia. The
continental money was then almost worthless, having caused, as
Mr. Morris said, "Infinite private mischief, numberless frauds,
and the greatest distress," and he rightly believed that a large
bank, properly conducted, and under control of the government
would be of great service to both the government and the people.
The capital of the bank was $400,000, and its affairs were con-
ducted by a board of twelve directors, under the inspection of
the superintendent of finance, who was to receive daily reports
of the business of the bank. By the fortunate arrival of $470,-
000 in specie from France about this time, which was deposited
in the bank, thereby greatly strengthening its standing and
*Blll8 of credit were issues of pure fiat money, based upon no assets and
having only the faith of the people in the issuing government to support
them.
21G HISTORY OF BANKING.
credit, the bank was enabled to make large loans to the govern-
ment for the purchase of army supplies. Mr. Morris afterwards
said, "Without the establishment of a national bank, the business
of the department of finance could not have been performed,"
and the war could not have been successfully prosecuted.
As some doubt existed as to the validity of a charter from
Congress, the bank applied to and received one from the state
of Pennsylvania. After the close of the war the bank did a pros-
perous business, earning dividends as high as 14 per cent. These
tempting gains prompted the starting of another bank, but the
Bank of North America prevented competition by absorbing the
new institution, thereby increasing its capital stock to $830,000.
Some dissatisfaction arose among the "debtor class" of the bank's
customers on account of the bank's practice of requiring its
paper to be promptly met at maturity, and the legislature was
petitioned to annul its charter, urging "usury, ex-
Rep^red" tortion, favoritism, harshness to debtors and the
possession of undue political and commercial in-
fluence." Strange as it may seem, the petition was granted and
the charter annulled in 1785. The bank continued to do busi-
ness under its governmental authority, and in 1787 the legis-
lature of Pennsylvania repented of its former ill considered
action and renewed the charter. When Alexander Hamilton
took charge of the government finances in 1790 he was opposed
to continuing the Bank of North America as a government
agent, claiming that its state charter virtually annulled its
national one, and made the bank a state institution. Washing-
ton and Congress seemed to accept this view, and abandoned all
government connection with the bank. It continued to do
business as a state bank until the organization of our national
banking system, when it entered the list as a national bank. By
a special dispensation, in view of its illustrious origin, it was
permitted to qualify under the national banking law, without
changing its name, and so continues to the present time a vener-
BANK OF NORTH AMERICA. 217
able and useful institution, the oldest bank in the United States.
Between 1782 and 1790, the Bank of North America had
been the depository of the government funds, had collected and
disbursed the revenues, and performed most of the functions
which are now performed by the government treasury, but in his
report of December 13, 1790, Hamilton strongly recommended
the organization of a United States Bank large enough and
strong enough to furnish a uniform and stable currency as well
as to properly perform the duties of financial agent. In this he
took the ground that the government should not issue paper
money directly, but that a great bank, strong
Report°i7^ cnough for the purpose, should make such issue
subject to governmental restrictions. Hamilton
understood the functions of a bank and saw how it served as
a manufactory of credit. He said:
"Every loan which a bank makes is, in its first shape a
credit given to the borrower on its books, the amount of which
it stands ready to pay, either in its own notes, or gold or silver
at his option. But, in a great number of cases, no actual payment
is made in either. The borrower, frequently, by check or order,
transfers his credit to some other person, to whom he has a
payment to make, who in his turn is as often content with a simi-
lar credit because he is satisfied that he can, whenever he pleases,
either convert it into cash or pass it to some other hand, as an
equivalent for it, and in this manner the credit keeps circulating,
performing in every stage the office of money, till it is extin-
guished by a discount with some person who has a payment to
make to the bank, to an equal or greater amount. Thus large
sums are lent and paid, frequently through a variety of hands,
without the intervention of a single piece of coin."
A bill was introduced, in accordance with Hamilton's sug-
gestions, for the creation of the first United States Bank, to be
located in the city of Philadelphia. This bill met with strenu-
ous opposition from the "strict constructionists." Madison
318 HISTORY OF BANKING.
was the leader of the opposition in the House, his main objection
to the measure being "That the power of establishing an incor-
porated bank was not among the powers vested in Congress by
The First *^^ Constitution." But in answer to this, Hamil-
united states tou cxpoundcd the doctrinc of implied powers,
claiming that the power to create a bank was
clearly implied from the express power given Congress by the
constitution. The bill became a law on February 25, 1791. Its •
chief provisions were:
1. The bank was to have a capital of $10,000,000, divided
into 25,000 shares of $400 each. Eight millions of the capital
stock were open to subscriptions by the people, one-fourth to be
paid in specie and three-fourth in government bonds. The
remaining two millions were to be subscribed by the government,
payable in ten annual installments.
2. Each stockholder could cast one vote for one share of
stock, one for the next ten shares, etc., but no shareholder could
cast more than thirty votes. Foreign stockholders could not
vote by proxy, and thus were practically prohibited from voting,
the object being to prevent the bank from being controlled by
a few individuals or by foreigners.
3. The bank was to be managed by twenty-five directors, all
of whom must be citizens of the United States.
4. The bank could lend money on real estate security
but could not hold title to real estate except temporarily, until
it could be properly disposed of.
5. The bank could issue circulating notes to the amount
of its capital stock. These notes were receivable for public dues
as long as they were payable in gold and silver coin.
6. The head of the treasury should have the right to inspect
all accounts of the bank except depositors' accounts, and could
call for reports weekly if he desired.
7. The directors could establish branches as they chose
for the purpose of deposit and discount.
FIRST UNITED STATES BANK. 2ld
8. The bank's charter was to run twenty years, and the
government pledged itself to grant no other charter for a like
institution during that period.
Branches were organized in New York, Boston, Baltimore,
Norfolk, Charleston, Savannah, Washington and New Orleans,
Branches, and the bank at once became a successful and pros-
Frnanciai pcrous institution. After the abandonment of the
Success Bank of North America by the government as a
place of deposit for public funds, the customs receipts of 1790
and 1791 had been deposited in state banks. These were drawn
against for current outlays, and the cash receipts were placed in
the Bank of the United States, thus gradually the accounts of the
government in the state banks were depleted and extinguished
and the national funds passed into the hands of the Bank of
the United States. The great bank thus became the custodian
of the government funds. It sold bonds, transferred funds from
place to place as needed, and disbursed public money on warrants
as directed by the treasurer. It also made loans to the govern-
ment, and by 1795 these amounted to nearly $6,000,000. The
bank was a great financial success. By its policy of satisfactory
dealings with the public and the government it maintained an
excellent reputation. Its paper currency had the effect of giving
stability and uniformity to the money of the country, and in
many ways it contributed to the national prosperity and welfare,
besides earning dividends at an average rate of 8f per cent,
for its stockholders.
The government was very slow with the payment of its
installments to the capital stock of the bank and in 1796 the
first, second, third, fourth and fifth installments were due and
almost wholly unpaid. The government then began selling its
stock to private individuals and by 1802 its entire interest had
been disposed of. In 1809 Secretary Gallatin reported that
the government had made a profit of $671,860 on the sale of its
stock in the bank. A large portion of the stock had passed into
230 HISTORY OF BANKING.
the hands of foreigners, so that only 7,000 shares were owned
by American citizens, while 18,000 were held abroad. The cir-
culating notes outstanding at that time were $4,500,000; specie
on hand, $5,000,000; loans and discounts, $15,-
the Bank^ ° 000,000. Thus the bank was in excellent condition,
and the stockholders in 1810 applied for a renewal
of its charter, enumerating in their petition to Congress the
advantages which the bank had afforded the government, as a
depository of the public funds; the transfer and disbursement
of public money free of cost; loans to the government; a stable
paper currency; profit from the sale of stock, etc.
A contest of extreme bitterness ensued. Secretary Gallatin
strongly recommended the renewal of the charter, with an in-
crease of the capital of the bank to $30,000,000. Of this amount
$15,000,000 should be subscribed by such states as desired it,
and branches should be organized in all states thus subscribing.
In anticipation of the prospective war with England, Mr. Gallatin
inserted a clause in the proposed charter obligating the bank
to lend three-fifths of its capital to the government whenever re-
quired to do so. Just at this time the feeling against England
ran high, and the fact that 18,000 shares of the bank were held
abroad, mostly in England, aroused a strong feeling of resentment
and opposition towards the bank. Mr. Gallatin reminded the
Opposition to peoplc that foreigners had no voice in the con-
Renewai of duct of the bank, and that in case the renewal of
the Charter ^-^^ charter was denied, it would be necessary to
remit about $7,200,000 abroad at once in settlement for the
stock held there, that being its market value, and that the country
could illy afford to spare that amount of specie on the eve of war,
when every dollar would be needed at home, whereas if the
charter was renewed it would only be necessary to remit to
England the annual dividend of about 8J per cent., equivalent
in effect to having an English loan of $7,200,000 at 8i per
cent, to aid us in the war. But such arguments only seemed
FIRST UNITED STATES BANK. 281
to inflame the opposition. Henry Clay, then just coming into
popularity, threw his influence on the side against renewal, on
the grounds that "the Constitution did not originally authorize
Congress to grant the charter," hence a renewal of it would
be unconstitutional for the same reason. Five years later Mr.
Clay was a strong advocate of the establishment of the Second
Bank of the United States, having reversed his former opinion
on the question of constitutionality.
The decisive vote for renewal was taken in the House on
January 24, 1811, and failed by a majority of 165 to 64. The
Senate voted on a similar bill on February 20, resulting in a
tie — 17 to 17, whereupon George Clinton, the Vice President,
cast the deciding vote against the bank. The bank went into
liquidation and paid the shareholders $434 for each share of
$400. Irresponsible state banks now sprang into existence
everywhere, hoping to reap the profits heretofore enjoyed by the
Bank of the United States. The country was flooded with
paper money, secured* by insignificant reserves. In this state
of affairs, with its financial machinery disorganized, the country
in the following year entered upon a war with
E^pan«\)n*' Great Britain. A more reckless and unfortunate
condition of affairs could scarcely exist. Bank
charters were very loosely granted by the various states, and in
some instances banks were allowed to begin business before
their capital stock had been actually subscribed, and they traded
on the money received from depositors. At the time of the
closing of the Bank of the United States in 1811 there were in
existence eighty-eight state banks with a combined paper circu-
lation equal in value to the notes of the United States Bank,
and hence equal to gold, amounting to $28,000,000. This num-
ber increased until in 1815 there were 208 banks with $110,000,-
000 notes outstanding. This unwarranted increase in banks and
paper money was fast placing the country in a condition where
disaster was inevitable. In 1814, the British captured the city
222 HISTORY OF BANKING.
of Washington and burned the White House. The news spread
consternation throughout the country and caused a bank panic,
resulting in the suspension of specie payments throughout the
country, with the exception of portions of New England. There
the laws had been more stringent and imposed a penalty upon
any bank which should fail to redeem its notes in coin. This
had the effect of restraining the over issue of circulating notes,
and hence the New England banks were able to weather the
storm, and kept their notes at par with specie throughout the
crisis. Wherever specie payment was suspended, there deprecia-
suspension ^^^^ ^^ ^^^ Currency at once set in, and since the
of Specie paper money was issued by banks in different
Payments gtatcs, uudcr a Variety of laws and conditions, the
depreciation was not uniform. In New York it was 20 per cent.,
in Philadelphia 24 per cent, and in Baltimore 30 per cent.
The citizens of New England paid their taxes and other obliga-
tions in money as good as gold, while those of New York, Penn-
sylvania or Maryland paid in depreciated paper. The injustice
of this was apparent, but the government could not remedy the
evil, since the depreciated paper was the only money to be had
in a large portion of the country. Government bonds were sell-
ing at 85 cents on the dollar, although paid for in currency
worth only 70 to 80 cents. To prosecute a war successfully
under these conditions would seem a very difficult undertaking.
Its success must have been due in a very large measure to the
patriotism of the people. Many of the state banks scattered
throughout the various states were government depositories, and
held large amounts of government funds, but as the depreciated
currency of one state would not circulate in another the gov-
ernment was unable to transfer the surplus it might have in one
locality to places where it was needed to meet public demands.
To overcome this evil, it became necessary to issue treasury notes.
The friends of the United States Bank ascribed all of the
existing evils to the failure to renew the charter of the bank
FIRST UNITED STATES BANK. 323
and its resulting consequences, and this view was generally
acquiesced in. If the bank's charter had been renewed $7,200,-
000 in specie need not have been shipped to Europe to pay the
stockholders, thus draining the country of a large part of its
gold and furnishing England with money to prosecute a war
against us. The increase in the number of state banks would
have been prevented and their issues of paper money in excess
of their power to redeem would have been avoided. Secretary
Gallatin said: "Suspension (of specie payments) might have
been prevented at the time when it took place had
th?curr°ency ^^^ former Bank of the United States been still
in existence." During its life-time the bank had
regulated the currency by means of its example, its strength,
and the fact that it was the fiscal agent of the government. Its
own notes were always equal to specie and the state banks were
required to keep theirs up to the same standard, or otherwise they
would be "thrown out" by the great bank, and no longer re-
ceived for taxes and government dues. With a bank's notes
thus discredited its customers would desert it for other and mare
responsible banks or for the branches of the United States
Bank, located throughout the country. Thus the term "Kegu-
lator of the Currency" was not a misnomer when applied to
the great Bank of the United States.
Notwithstanding the war was over a few months after the
suspension of specie payments, and commerce resumed its cus-
tomary channels, no effort was made by the state banks to re-
sume specie payments. It was not to their pecuniary advantage
to do so, as long as they could float a large volume of irredeem-
able paper money. A year passed and yet the banks showed
The Second ^^ ^^S^ ^^ attempting to resume. The welfare of
United States the couutry demanded that something should be
done, and yet Congress had not power to compel
the state banks to change their policy. Naturally public opinion
turned in favor of a new bank modeled on the plan of the
224 HISTORY OF BANKING.
former one. President Madison, although opposed to the first
bank on constitutional grounds, now in his message of December
5, 1815, suggested a national bank as a suitable instrumentality
for bringing about the resumption of specie payments. Secre-
tary Dallas urged the organization of such a bank, and on
April 10, 1816, Congress passed a law creating the Second Bank
of the United States, on lines similar to the first, with a capital
of $35,000,000. Later on Mr. Webster introduced a bill to
the effect that after February 20, 1817, the secretary of the
treasury should receive for public dues only treasury notes, the
notes of the United States Bank and of those state banks
which were paying specie on demand. This virtually compelled
the resumption of specie payments on the date mentioned, after
a suspension otf two and a hali years.
CHAPTER XXIII.
BANKING IN THE UNITED STATES.
SECOND UNITED STATES BANK; THE GREAT BANK WAR; SUFFOLK
BANK SYSTEM; SAFETY FUND SYSTEM;
WILD CAT BANKING.
The charter of the Second Bank of the United States was for
twenty years. Its capital was $35,000,000, of which amount the
government subscribed $7,000,000, and in consideration of this
five of the twenty-five directors were to be appointed by the
President. The main bank was located in Philadelphia and
branches were established in different states wherever two thou-
sand shares or more of the bank's capital had been subscribed.
The bank and its branches were to have the deposits of the
national treasury, transact exchanges, negotiate loans and perform
other similar duties for the treasury free of charge. The bank
Charter of the ^^^ allowcd to issuc uotcs in denominations of not
Second United less than $5 ou the same terms as the first bank,
that is to say, its aggregate note circulation must
not exceed its capital stock. Its notes were given preference
over all others by being receivable for all dues to the United
States. These notes were payable on demand, and in the event
of the bank failing to redeem its notes or suspending specie
pa3'ment, it was required to pay interest at 12 per cent, on its
notes. Congress pledged itself not to grant a charter to any
other bank during the life of the charter to this. Thus it will
be seen that the Second Bank of the United States was similar
in its main features to the first. It was larger, its note issues
would be greater, and to prevent the bane of irredeemable paper
money, a penalty in the form of interest was imposed upon it.
It began business on January 7, 1817, and on the 20th of the fol-
225
326 HISTORY OF BANKING.
lowing February specie payments were resumed and the country
was once more upon a sound financial basis.
In 1819 the question of the constitutionality of the bank's
charter was definitely decided by the Supreme Court of the
United States in the case of the State of Maryland vs. McCul-
loch. The United States Bank had established a branch in
Baltimore. The state of Maryland had enacted a law that all
bank notes circulating within the state must be printed upon
stamped paper for which a tax must be paid to the state. The
branch did not use this paper and declined to pay the tax,
whereupon the state brought suit for violation of the laws of
Constitutional- Maryland against Cashier McCulloch as the officer
unitid States ^^ *^® bank. The contention was made that the
Bank Settled branch bank was without warrant of authority
under the laws of the United States, and that Congress had no
power under the Constitution to create a bank. In passing
upon this question the doctrine of implied powers was fully
established. Since Congress has the power to lay and collect
taxes, borrow money and regulate trade, it was decided that it
had the power "to make all laws which shall be necessary and
proper for carrying into execution the foregoing powers." In
rendering the decision of the court in this important case Chief
Justice Marshall said, "It is the unanimous and decided opinion
of this court that the act to incorporate the Bank of the United
States is a law made in pursuance of the Constitution. The
branches, proceeding from the same stock, and being conducive
to the complete accomplishment of the object, are equally con-
stitutional," and hence the court declared that they were not
subject to any state taxes or restrictions, since their usefulness
might thereby be impaired or their existence even destroyed.
In 1819 a financial panic overspread the country. Banks
and business houses failed in large numbers and general com-
mercial distress and depression prevailed. It leaked out that
irregularities had been practiced in the management of the
SECOND UNITED STATES BANK. 327
Bank of the United States, and Congress ordered an inv^stiga-
tion. A shameful state of affairs was unearthed and the bank
was found to be on the verge of ruin. The officials seemtid to
have been imbued with state banking fallacies and had paid little
attention to the restrictions of their charter. They
Bank Scandals had discouutcd the notcs of stockholdcrs on the
pledge of their stock as security to the amount
of over $8,000,000. They had also allowed stock to be sold
and transferred before it was fully paid for. They even ad-
vanced more than the par value of the stock in some instances.
Among the requirements of the charter was one that there
should be no dividends paid on shares that were not fully paid.
This provision had been repeatedly violated. The president
and cashier of the Baltimore branch had helped themselves to
large amounts of money on scant security, and withal the bank
was well nigh insolvent. It was saved from complete failure
by its new president, who borrowed $2,500,000 in Europe,
and took heroic measures to make stockholders pay up. From
this experience in our banking history we learned the lesson
that a bank should not loan money on its own shares, much less
those which are not even paid up, for in order to realize on the
security it must impair its own capital. Such loans when in
default become equivalent to the purchase of a bank's own
stock and that is the same as partial liquidation. In a time of
stringency such a practice will almost surely put a bank in
jeopardy. The Bank of the United States got itself into this
predicament in the panic of 1819, and had it not been for the
loan secured in Europe and the treasury balance on deposit
there, it would have been forced to close its doors.
Under proper management the bank gradually regained its
wonted strength, and thereafter controlled the financial system
of the country, rendering valuable service in its capacity as
"Eegulator of the Currency," and as the fiscal agent of the gov-
ernment. The people as a whole regarded the institution as their
328 HISTORY OF BANKING.
deliverer from the evils of a debased money system, and, with the
exception of a few disgruntled borrowers, together with stock-
holders whom the bank compelled to pay up, and the state banks
who had been forced to redeem their notes, it appeared to be
solid in the confidence and good will of the people. Imagine,
then, the general surprise when in 1829, General Jackson in
his message attacked the bank, and declared that it had "failed
in the great end of establishing a uniform and sound currency."
Jackson's People who knew anything about the matter must
Hostility to havc kuowu that this statement was false, and
the Bank ^^^ ^^ great was the popularity of the old hero
that many were willing to accept anything he said. General
Jackson's opposition to the bank could not have been caused
by financial reasons. He was no doubt led to believe that the
bank had been hostile to his election and he proposed to destroy
the "monster." President Biddle of the bank declined to allow
political affairs to influence or in any way meddle with the
management of the concern, and intimated that he needed no ad-
vice from the White House. All of this aroused President
Jackson's ire and he became convinced that the bank was a
giant monopoly dangerous to the welfare of the government
and people, and that it was his duty to destroy it.
On the other hand, the National Republican party, headed
by Clay and Webster, immediately took sides as defenders of the
bank against President Jackson. Although the bank's charter
would not expire until 1836, a bill was introduced into Congress
in the Spring of 1832 and passed for a renewal of the charter.
It went to President Jackson in July and he vetoed it with a
ringing document. President Biddle of the bank was reported as
having said that he would defeat President Jackson for re-
election on account of his veto of the bank bill. This threat
aroused the General, and he declared "By the Eternal that is too
much power for any one man to have in this country," and was
then more than ever determined to destroy the bank. The
THE GREAT BANK WAR. 229
presidential campaign was then on, Henry Clay being the op-
ponent of General Jackson, and the leader of the friends of the
bank. The bank charter was the chief issue of the campaign, but
Jackson's popularity was so great that he won re-election by an
overwhelming majority. Taking his re-election as
Banifwal au endorsement of his position on the bank ques-
tion, President Jackson proceeded to deal the
death blow to what he considered his enemy. On the pre-
text that the bank was unsafe he ordered the secretary of the
treasury to remove from it the government deposits, and place
them in certain state banks. Secretary Duane refused to do
this, and Jackson removed him and appointed Roger B. Taney
in his stead. Taney carried out the wishes of his superior. No
more deposits were made in the United States Bank and war-
rants for current expenses soon exhausted the government bal-
ance there.
The government funds were then deposited with state banks
carefully selected with reference to party loyalty. This raised
a storm of protest from Jackson's political op-
Removcd poucnts, who branded the proceeding as unlawful,
being a violation of the contract under which the
bank came into existence. The bank had paid $1,500,000 as a
bonus for the government deposits during a period of twenty
years and now it was deprived of the benefits of these deposits
three years before the expiration of the time. Party feeling
ran high, and in the ensuing Congress a resolution of censure
was passed by both houses as follows: Resolved, that the presi-
dent, in the late proceeding in relation to the public revenue,
has assumed upon himself authority and power not conferred by
the constitution and laws but in derogation of both." The
president protested against the proceeding, but the resolution
stood upon the records until 1837, when it was expunged in an
all-night session of the Senate, after a fierce party struggle.
The withdrawal of the deposits was a serious blow to the
330 HISTORY OF BANKING.
Bank of the United States, but it continued on until the expira-
tion of its charter in 1836. It then took out a charter as a state
bank, and continued business until 1841, when it failed. Nicho-
las Biddle was reduced from wealth to pauperism. Thus ended
the great bank war, in a triumph for President Jackson. Specie
payments were suspended again in 1837, the only retaliation
against Jackson^s victory, and the country was again to struggle
for a time with state banks and wildcat currency.
The state banks in existence in 1833, when Andrew Jackson
transferred the deposits to them, were of all kinds, based upon
every conceivable system and form of legislation. It seemed as
though the period of nearly thirty years just prior to the enact-
ment of our National Banking Act was to be used for testing
every theory and making every experiment that could be neces-
sary in order to culminate finally in the national banking system.
The banks in Massachusetts were the best managed. Being
under severe restrictions, and a penalty in case of failure to pay
specie on demand, they were the most stable. The "Suffolk
Bank System" of Boston also acted as a powerful check against
improvident management. This system arose from the deter-
mination of the solvent banks of Boston to compel the smaller
ibanks located in the remote corners of the state to redeem their
notes by keeping on deposit in Boston a fund for this purpose.
The notes were presented daily through a clear-
sy^em^^"^ iug housc, in very much the same way as checks
are cleared. Any bank refusing to keep a fund
for this purpose was liable to have its notes thrown out or re-
fused, and thus be discredited. This system, which at one time
included over five hundred banks, served to restrict note issues
and proved a valuable expedient for the time being.
In New York the "Safety Fund System" was established, by
which each bank was required to deposit with the state treasurer
three per cent, of its capital as a fund for the security of note
holders and depositors. In case the fund became exhausted
IN NEW ENGLAND. 231
all the solvent banks were to be taxed to replete it. The fund
was afterwards set aside for the protection of note holders only,
it having been found wholly insufficient to protect
sylVem^"'"* both notc holdcrs and depositors. The "Safety
Fund System" resembled in many respects the
present Canadian banking system, which has a safety fund of
five per cent, as a protection for note holders. Other expedients
were tried in various states. In some of them the state had a
voice in the management of the banks and in others it was a
sharer in the profits. Thus the country went, feeling its way,
until the panic in 1837 caused hundreds of banks to fail, no
doubt covering up many an instance of defalcation and dis~
honesty. That panic proved that the safety fund system of
New York was wholly inadequate, and that state then adopted
the "Free Banking System," which permitted any-
system*'^^^'*^ ouc to form a bank and issue notes without a
charter from the legislature, as had been the
custom in the past. The notes must be based, however, upon
either United States bonds or bonds of the State of New York,
or approved real estate security, deposited with the state treas-
urer. In case of the failure of a bank the state treasurer was
authorized to sell the securities and apply the proceeds to the
redemption of the outstanding notes of the bank. Other states
copied after the free banking system of New York, and it
became very popular. The merits of the system depended chiefly
upon the quality of the securities and the convertibility of them
in a time of stringency. Real estate mortgages were subject to
great depreciation and at forced sale bonds often brought much
less than their face value.
In some other states no adequate attempt was made to pro-
tect the note circulation or supervise the banking system, and
the result was a large number of banks of the most irresponsible
character, many of them permeated with dishonesty, so bad as to
win the title of Wild Cat Banks. Senator Sherman, in his "Eec-
332 HISTORY OF BANKING.
ollections," referring to wild cat banking in the 40's and 50s,
says: "We had every diversity of the bank system devised by the
wit of man, and all these banks had the power to
Banking* "^^^^^ paper money. There was no check or con-
trol over them." Manifold evils resulted from
this want of uniformity and of public regulation. Coun-
terfeiters plied their dishonest practices to an alarming extent,
and there were 5,400 spurious notes catalogued as being in
circulation at one time. "Counterfeit Detectors" and "Bank
Note Keporters" were important publications to which bankers
and merchants subscribed, in order to be posted on the spurious
bills in circulation. Disputes between buyer and seller as to the
goodness of the bank notes were of almost constant occurrence,
and if there was a bank in the town the cashier was constantly
appealed to for his opinion on the genuineness of * notes in
circulation.
CHAPTER XXIV.
BANKING IN THE UNITED STATES.
NATIONAL BANKING SYSTEM; ORGANIZATION; RESERVE;
CIRCULATION; SUB-TREASURY SYSTEM.
When the Civil "War broke upon the country it found the
national government illy prepared to meet the enormous expendi-
tures which a war entails. The treasury was almost empty, and
yet vast amounts of money were needed at once. Gold had been
hoarded and exported in anticipation of war to such an extent
that in the winter of 1861 the banks suspended specie payment.
This left no circulating medium except the state bank notes. In
1862 and 1863 the government, to relieve the situation, issued
$450,000,000 of government notes, called "greenbacks," with
which it purchased the munitions of war and paid its expenses,
but depreciation set in and further issues of such notes were
stopped. It then became necessary for the govem-
u. s. Bonds ment to borrow money, and issue its obligations in
the form of bonds. In order to find a market for
those. Secretary Chase, of the treasury department, proposed to
offer as an inducement to their purchase certain banking priv-
ileges. He worked out the scheme of our national banking
system and urged the organization of national banks, first in
his report of December, 1861, and again in 1862. The chief
points of advantage in his scheme were that it would create a
demand for government bonds, in return for which the national
treasury would receive large amounts of much needed cash,
and second it would give the country a safe, uniform and stable
note circulation. After much consideration Congress passed
the National Banking Act, and in February, 1863, it received the
president's signature and became a law.
234 HISTORY OF BANKING.
The original act was crude and unsatisfactory and has been
often amended, but the general features of the system remain.
In 1864 an amendment was made forbidding national banks from
making loans on landed security, which had been permitted by
the original act. The law was so framed as to enable state banks
to become members of the national system by the simple process
of conversion without reorganization. Every inducement was
made to the state banks to lead them into the system, but they
were slow to make the change. On March 3, 1865, a law was
enacted imposing a ten per cent, tax per annum
Stete Banks°^ upon the notc issues of all state banks. This was
a death blow, as it was intended to be, and drove
the state bank notes out of existence, leaving the field clear to
the national bank circulation. Following this law the state
banks rapidly came into the national system, and on the first
af January, 1867, there were $391,093,294 of national bank
notes in circulation. The large increase in the number and
capital of the national banks meant an increased demand for
government bonds, which in turn meant vast receipts of cash
to the government treasury. Government bonds had been pre-
viously selling at 7 per cent, discount. The demand raised
their price above par and thus the system proved of the greatest
assistance to the government.
But the 10 per cent, tax which virtually made state bank
issues unprofitable and hence impossible, aroused considerable
opposition on the part of the state bankers. Congress was
accused of overstepping its constitutional limitations in its at-
tempt to interfere with state institutions. Suit was brought by a
bank in Maine to recover the tax which it had paid, and in the
brief submitted to the United States Supreme
urofthe Law ^^ourt, the contention was made that the state had
a right to charter a bank and empower it to issue
circulating notes. This right had been exercised by all of the
states from the foundation of the republic, without objection
NATIONAL BANK ACT. 235
or interference from Congress. It had been recognized and
upheld by the Supreme Court itself in a previous case. Now to
subject the bank to a tax of ten per cent, was virtually to destroy
this right, and thus encroach upon the prerogatives of the state
in a manner unwarranted by the Constitution. The court
decided that "Congress had the undisputed power to provide a
currency for the entire republic, and that in the exercise of that
power it might, if it saw fit, by taxation or otherwise restrain
the circulation of any notes not issued by its immediate author-
ity."
Thus was formed a national banking system infinitely more
powerful than the bank which Jackson waged a war upon, on
account of his belief that it concentrated too much power in the
hands of a few men, but a system which has proven all of Jack-
son's fears to be groundless. The favoring conditions in the
formation of the national banking system were the stress of war,
and the assumption of implied powers by the government made
necessary in order to carry on its struggle for existence.
The principal features of the national banking system are
as follows:
A currency bureau has been established as a department of the
treasury, under the management of an oflScer called the Comp-
troller of the Currency. This bureau is charged with the execu-
tion of the banking law and the regulation of all details of the
organization and management of national banks, the issue to
such banks upon receiving their deposits of United
Bureau*^^ States bonds, the appointment and supervision of
inspectors of banks, etc. The Comptroller must
not be interested in any national bank either directly or indi-
rectly. He must make an annual report to Congress of the
conditions of all national banks.
At least five persons are necessary to form a national bank.
Articles of association setting forth all of the details concerning
the proposed bank, its name, place of business, capital, etc., are
236 HISTORY OF BANKING.
signed by the five stockholders and transmitted to the Comp-
troller at Washington, who, upon approving them and satisfying
himself as to payment of the capital and compliance with other
Organization requirements of the law, issues a charter for twenty
of National years. This charter may be renewed for a like
term of twenty years. The law authorizes national
banks to exercise by its board of directors or duly authorized
officers or agents, subject to law, all such incidental powers as
shall be necessary to carry on the business of banking; by dis-
counting and negotiating promissory notes, drafts, bills of ex-
change and other evidences of debt; by receiving deposits; by
buying and selling exchange, coin and bullion; by
BuSness*^^ loaning money on personal security, and by ob-
taining, issuing and circulating notes." But they
are not permitted to loan money on real estate security or hold
real estate except such as is necessary for the conduct of ^he
business, or may have been acquired in liquidation of previous
obligations, and then only until it can be disposed of without
sacrifice.
The affairs of the national banks are managed by a board of
not less than five directors, elected annually by the stockholders,
as in the case of other corporations, except that all directors
of national banks must be American citizens, and own at least
ten shares of stock. Stockholders are under the
stockholders ^^doublc liability" obligation, i. e. every stockholder
is liable for all of the debts and liabilities of the
bank to the extent of the amount of the par value of his stock
and as much more besides'.
At least one-half of the capital stock must be paid in before
beginning business and the balance in five equal monthly install-
ments. The amount of the capitalization of the bank is also con-
trolled by law, and depends upon the population of the town or
city in which the bank is to be located. In cities of 3,000 or
less population the capital must not be less than $25,000, in
NATIONAL BANK ACT. 237
cities of more than 3,000 and less than 6,000 the capital must be
not less than $50,000, in cities of more than 6,000 and less than
50,000 the capital must be not less than $100,000,
Capital and in cities of 50,000 or over it must be not
less than $200,000. A bank with a capital of
$150,000 or less must deposit with the Treasurer of the United
States government bonds equal to one-fourth its capital. A bank
with a greater capital must deposit at least $50,000 in bonds.
These bonds may be used as a basis for circulating notes or not,
according to the option of the bank. No bank is compelled to
issue notes.
A national bank may issue circulating notes to the amount of
90 per cent, of the par value of the government bonds deposited
with the Treasurer of the United States.* The Comptroller
furnishes suitable notes, in blank, in denominations of $5, $10,
$20, $50, $100, $500 and $1,000, and these when signed by the
officers of the bank are ready for issue over the
Circulation bank's couutcr. Bank notes are receivable in all
parts of the United States in payment of taxes,
excises, public lands, and all other dues to the United States
except duties on imports and interest on the public debt.
Each national bank is required to keep on deposit with the
Comptroller of the currency a deposit equal to five per cent, of
its circulation, as a fund for the redemption of its worn out or
mutilated notes. When notes become worn, defaced or mutilated
so that they are no longer fit for circulation they will be replaced
with new notes by the Comptroller. The old notes are then
"macerated" or destroyed by the process of grinding them to a
pulp. Whenever the redemption of notes for any bank amounts
to $500 it is called upon to replenish its deposit.
Any bank desiring to reduce its volume of circulating notes
may do so by paying into the United States treasury either the
*This was the original provision of the law, but by the Act of 1890 the
limit was raised to the par value of the bonds deposited.
238 HISTORY OF BANKING.
notes themselves or a sum of lawful money with which the Comp-
troller may redeem them, and a corresponding amount of gov-
ernment bonds will then be released from deposit
Sl^cu?adr^°^ and returned to the bank. To prevent any sud-
den or serious contraction of the currency of the
country, the law prescribes that not more than $3,000,000 of
notes shall be retired by all of the banks in any one month. Of
course no bank can withdraw bonds below the minimum required
to be deposited irrespective of circulation. Certain enumerated
cities in various parts of the country are denominated "reserve
cities,^' among which are 'New York, Chicago, Boston, Cincin-
nati, Baltimore, Albany, Cleveland, Detroit, Philadelphia, St.
Louis, San Francisco, Milwaukee, Louisville and Washington.
The banks in these cities are required to keep on hand a sum
of money equal to 25 per cent, of their deposits. Banks in other
cities are required to keep a reserve of 15 per cent., but three-
fifths of this may consist of deposits with banks
Reserve in Tcscrve citics. The five per cent, redemption
fund on deposit with the Comptroller may be
counted as a part of the reserve. When a bank's cash falls below
the reserve limit, it is forbidden to increase its liabilities by
making new loans or discounts, or to declare further dividends
until the cash reserve is restored. Failure to restore the reserve
may subject the bank to forced liquidations at the discretion of
the Comptroller.
The safety of the banks is guarded by the law through a
number of wholesome restrictions, among which are, that no
real estate acquired under judgment decrees or
Restrictions mortgages may be held for more than five years.
N"ot more than one-tenth of the capital of the
bank may be loaned to one individual, corporation or firm,
directly or indirectly, nor may any bank lend money on its own
shares, but they may be taken as security for a debt previously
contracted in good faith. Unearned dividends must not be
NATIONAL BANK ACT. 339
declared. If the capital is impaired by losses, the deficit must be
made good by an assessment on the shareholders if necessary.
One-tenth of the net profits must be annually added to the sur-
plus fund until the fund shall amount to 20 per cent, of the
capital.
Every national bank is required to make not less than five
reports of its condition each year to the Comptroller, verified
by the oath of the president or cashier and the signatures of at
least three directors. In addition to this special reports as to
dividends and earnings are made each half year.
Exan^ners Reports are usually called for a prior date, so as
to give bank officials no opportunity to patch up
affairs. As a further safeguard, bank examiners are employed
by the Comptroller, whose duty it is to make a thorough exam-
ination of the affairs of all national banks, inspect books, securi-
ties, assets and liabilities, and report the results of such finding
to the Comptroller.
The Comptroller also has charge of the settling up of the
affairs of failed national banks. He appoints the receivers and
fixes their compensation. All money received for the assets of
the bank is turned over to him and he pays out dividends to
creditors. The Comptroller also declares the bonds
Failed Banks* ^^^^ ^^^ sccurity of circulation forfeited, and gives
notice to the holders of all notes of the defunct
bank to present them at the treasury for payment.
In the early days of the national banking system circulation
was extremely profitable. Government bonds bore five and six
per cent, interest and kept constantly increasing in value, and
this, added to the profits on circulation issued against the bonds,
acted as a strong inducement to the organization of national
banks. In consequence of this increase in the number of banks
of issue the volume of bank notes constantly rose until in Decem-
ber, 1874, it amounted to $354,394,346. From this point it
experienced a slight falling off until in 1883 it reached high
240 HISTORY OF BANKING.
water mark in a volume of $362,651,169. The retirement of
bonds by the government and refunding them at lower rates
of interest then acted to reduce the volume of circulation and
Volume of ^^ ^^^ ^^^^ ^^ ^^^^ ^^ $167,927,974. Since then
Bank Note it has showu increascs whenever there have been
Circulation ^^^ .g^^^g ^^ ^^^^^ rpj^^ ^^^ ^f -^^qq permitted
banks to issue notes to the amount of the paid in capital and to
100 per cent, of the market value of the bonds deposited, pro-
vided this did not exceed their par value. The tax on circulation
was reduced from one to one-half per cent, and the effect has
been an increase in the volume of bank note circulation.
It will thus be seen that the aggregate circulation depends
approximately upon the current price of bonds and not upon the
demands of business. When it is profitable to issue notes the
banks do so, and when the market price of bonds insures to
their owners better profits than by the deposit of them to secure
circulation, then the banks contract their circula-
the CuJrem:y^ ^^°^- ^^ ^^^^ happens that frequently when there
is the greatest need of a large circulation in order
to carry on the business of the country, the price of bonds makes
it advantageous to the banks to reduce the volume of their notes,
and surrender their circulation. This is one of the serious
defects of our currency system. Eeal elasticity, whether of
contraction or expansion, to adapt its volume to the needs of
business is unknown under this system. But were expansion
and contraction even possible under our system, it would be too
slow and cumbersome to meet the requirements of business.
Bonds must be sent to Washington, notes must be printed, for-
warded and signed, all entailing a delay of several weeks, beford
the money is ready for circulation. A money stringency might
arise, produce its unfortunate results and subside before the
needed relief could be obtained through the channel of the ex-
pansion of bank note circulation.
The sub-treasury system of the United States seems to ag-
SUB-TREASURY. 241
gravate rather than correct the shortcomings of our bank note
circulation, by locking up in the vaults and thus withdrawing
from circulation many millions of dollars more than the govern-
ment requires to meet its current obligations just at a time when
it is most needed in circulation. Under our system of indirect
taxation this locking up of money proceeds at a greater rate
when business is prosperous and a larger volume of currency is
needed in the channels of trade than when business
Sub-Treasury -^ ^^ji £^^ ^j^^ icasou that in activc times im-
oystem '
portations are greater and the consumption of
those luxuries which are taxed under the internal revenue law
is greater, thus increasing the government receipts both from
customs and internal revenues.
A system of asset banking somewhat after the Canadian
method has been advocated for the United States as a relief
from the objections to the sub-treasury system and the fast and
hard rules of the National Banking Act. Certain it is that we
need a more elastic circulating medium, and it is almost equally
certain that a system of branch banking would be a decided
advantage to the country. The National Banking Act has served
the country so long and well that there is a reluctance to dis-
place it, but there is also a strong feeling that reform is needed
in our currency system to adapt it to changing conditions.
In order to maintain the country upon a specie basis it is
necessary for the United States treasury to keep a large specie
reserve on hand. The amount of this reserve has been fixed at
$150,000,000.* Under the "parity" clause of the
Resi^f ^^* 0^ 1^^^ ^* ^^^s declared to be the policy of the
United States to maintain the two metals (gold
and silver) on a parity with each other. In order to do this, when
treasury notes are presented for payment, they are paid in either
gold or silver, as the holder demands. In the spring of 1893
♦This amount was originally $100,000,000, but was increased in 1900 to
$150,000,000.
242 HISTORY OF BANKING.
the reserve in the treasury fell below the $100,000,000 mark,
owing to large exportations of gold. By the following January
the reserve had fallen to $65,650,000, and a feeling of fear
spread over the country lest the treasury should be unable to
maintain the reserve and values should go to a silver basis.
The Secretary of the treasury sold $50,000,000 gold bonds on
about a three per cent, basis and replenished the reserve. The
redemption of notes continued, however, and by the following
August (1894) the reserve had fallen to $52,000,000. In the
following November another issue of $50,000,000 was made to
restore the reserve. In January, 1895, $65,000,000 more of gold
bonds were negotiated and the proceeds placed in the reserve,
and in February, 1896, a fourth issue of $100,000,000 of bonds
was resorted to, which served to maintain the reserve until the
tide turned and gold began to flow into instead of from the
United States treasury. This process of redeeming treasury
notes in gold and issuing them again only to have them in turn
presented for redemption in gold again, was called "the oper-
ation of the endless chain.^^
Prior to 1861 no notes not bearing interest were issued by
the United States treasury, but on July 17, 1861, Congress
directed the issue of $50,000,000 of demand notes in denomina-
tions of less than $50 in exchange for coin or in payment of
debts due the government. These were the first "sinews of war"
in the form of "greenbacks." The act of February 25, 1862,
increased the issue to $150,000,000. These notes were a legal
tender for all debts public and private except customs duties
and interest on the public debt. On June 11, 1862, Congress
increased the issue to $300,000,000 and on March 3, 1863, to
$450,000,000. After the war Congress gradually
Notes ****^ reduced the volume, but by the act of April 12,
1866, limited the retirement to $10,000,000 month-
ly for six months and $4,000,000 monthly thereafter. Dur-
ing the panic of 1873 the retirement of notes was discontinued
UNITED STATES NOTES. 243
and the volume outstanding increased by nearly $27,000,000,
bringing the total up to $382,979,815. But the act of January,
1875, provided for further reduction, and declared that on
January 1, 1879, specie payment should be resumed. In order to
prepare for the resumption of specie payments it was deemed
wise in May, 1878, to prohibit the further cancellation of "green-
backs" and the amount has therefore stood ever since at $346,-
681,016, as it was at the close of business on the day the act
went into effect.
The secretary was authorized by the act of March 3, 1863»
to receive deposits of gold coin and bullion and to issue therefor
certificates in denominations of $20 and upward, payable on
demand. The coin was to be held in the treasury for the re-
demption of the certificates. There were in circulation on July
1, 1901, gold certificates amounting to $247,036,359. These
certificates are not a legal tender but are receivable for customs^
taxes and all public dues. They are also available for the
reserves of national banks.
Silver certificates are issued upon deposits of silver dollars,
under the act of February 28, 1878, which authorized the coin-
age of the dollars. At first all deposits were limited to $10 or a
multiple thereof, and certificates were issued only
?ertificat!r'' in ^ike denominations, but the act of 1886 pro-
vided that certificates might be issued in denomina-
tions of $1, $2 and $5. The issue is limited to the amount of
silver actually deposited in the treasury. The certificates are
not a legal tender, but may be held by national banks as a part
of their reserves. The volume of silver certificates outstanding
on Julv 1, 1901, was $429,643,556.
CHAPTER XXV.
BANKING IN THE UNITED STATES.
STATE BANKS; PRIVATE BANKS; SAVINGS BANKS;
TRUST COMPANIES.
A large number of banks exist and flourish under state regu-
lations. Many of them were organized and engaged in business
prior to the formation of our national banking system and de-
clined to enter that system, but the larger portion have since
been organized from time to time to meet the real or supposed
needs for better banking facilities in the communities in which
they are located. As previously stated, by an amendment to
the National Banking Law in July, 1866, the government im-
posed a tax of ten per cent, upon the note circulation of all
state banks. The purpose of the tax was to drive the state bank
notes out of circulation and thus make room for the national
bank currency, and it accomplished its purpose perfectly. In
other respects, however, the state banks were unaffected and have
continued to do business in the same way, subject only to the
regulations imposed by the laws of the states in which they are
situated. A state bank discounts notes and drafts, receives
deposits, buys and sells exchange and performs all the regular
functions of any bank. Its internal mechanism and organization
of officers and clerks is substantially the same as those of a
national bank. The state laws usually require a directory of
five or more persons to manage the affairs of the bank, and it
must be a regularly organized corporation, formed and conducted
in compliance with the statute.
While national banks are usually considered as possessing
decided advantages over state institutions, the latter in turn
have, in the opinion of some bankers, decided advantages, among
244
STATE BANKS. 245
which may be mentioned: They are not subject to such severe
restrictions as to capital, reserve, etc.; are not examined so criti-
cally; are not, in many states, required to make
stair Banks ° rcports or returns; have greater liberty in the
making of loans, and may certify checks in excess
of the amount which the depositor has on deposit. This latter
right is strictly and rigidly denied to national banks, and at first
thought would seem to be only a wholesome restriction as applied
to any bank, but in certain classes of transactions, notably those
connected with the stock exchange, it may be necessary for a
bank to certify in excess of the deposit. While the practice is
clearly objectionable it may be necessary under certain con-
ditions. The banking laws of the different states are very dis-
similar and produce the same variety in the character of the
banks formed under them, so that in order to understand the
requirements and restrictions under which state banks exist, it
will be necessary to consult the statutes of the different states.
Next lower in the order of size and importance come the
private banks.* These differ from state banks, being usually
not corporations with a fixed capital divided into shares and con-
trolled by a board of directors, but having an
Private Banks indefinite Capital owned entirely by one or more
persons. The stockholders in a state bank are
limited in their liability to the bank, but in the case of a private
bank the owners or stockholders (in case of a stbck company)
are individually responsible for the liabilities of the bank without
limit. Private banks usually grow out of favoring conditions.
In a town too small to justify the organization of a national
bank with a capital of $25,000, and yet needing banking facili-
ties, a leading merchant who is well known as a responsible man,
decides to open a bank as an annex to his store. His bank
commands the confidence of the public, on account of his repu-
*In 1902 there were 1,302 state banks in the United States, according
to the Comptroller's repoiTtf
246 HISTORY OF BANKING.
tatiou for wealth, character and honesty. Or some man who
is in the habit of buying notes or making small loans at remuner-
ative rates, finally concludes to enlarge his office, and hangs out
his sign as a banker. The capital of a private banker may be
small, but he is well known in the community and is esteemed
for his ability and integrity. His bank is not subjected to
any examination by state or national authorities, nor is he re-
quired to make reports or publish statements of the bank's
condition. Such is the origin of many of the private banks. As
the resources of the community grow and the business of the
private bank gradually expands, it is frequently organized into a
state bank or merged into the national system.
As to the details of management of private banks, these are,
or should be, in compliance with the rules of larger institutions.
Even private bankers cannot ignore the rules of
Management safe banking without sooner or later suffering the
consequences. In rare instances the practice has
been adopted by private bankers of making public reports of
their condition, and these reports have been published along
with those of state and national banks, as a means of inspiring
public confidence. The private banker can offer to his customer
the advantages of unlimited liability for every obligation -of the
bank, and a greater concentration of responsibility, with a
stronger sense of direct personal interest in the welfare of the
concern than is felt by either the directors or officers of in-
corporated institutions, either state or national. The best guar-
anty which a customer can have of the soundness of his bank is
the integrity and ability of its management, and the private
banker can offer this as well as the state or national bank.
SAYINGS BANKS.
During the latter part of the 18th century there seemed to
be a general advance in the spirit of fraternal and provident
societies in Europe and especially in England, and out of this
SAVINGS BANKS. 247
grew the mutual savings bank as a means of taking care of the
poor who came to want by improvidence or misfortune. The
earliest institution of this kind was established in 1765, but not
until about the close of the century did these institutions become
permanently established. In 1816 and 1817 the need of savings
banks became apparent in New York and Boston.
SaWngs°Banks ^^^ couutry was then becoming well settled and
the people were able to accumulate a surplus out
of their earnings, but poverty prevailed throughout the country
generally, on account of the improvidence of the people, who
squandered their earnings and paid no attention "to those small
but frequent savings when labor is plentiful which may go to
meet privation in unfavorable seasons." A bill was introduced
into the New York legislature in 1819 and passed, for the in-
corporation of savings banks, and continues, with some modifi-
cations, as the basis of the savings bank system of the state at
the present time.
In 1900 there were in the United States 1,007 savings banks,
with deposits aggregating approximately $2,600,000,000, held
in the name of 6,000,000 depositors. This vast sum represents
the accumulated savings of a large class of people, especially
those who are inexperienced in handling or investing money and
whose savings are too small to loan or invest to advantage. The
savings bank offers to the weak the aid of the ex-
Character pericnced who understand finance, to receive their
small gains and hold them securely against that
time when need or desire may require the store for prudent use.
"It accumulates money; it inspires and trains men to get money
and to the wise use of it; it adds to the sum of national resources
in money, and adds to the means for advancement in material
improvement." Many state banks combine the functions of
banks of discount with those of private savings banks, and while
the character of the two are entirely different there is no con-
flict between them. The savings bank aims to gather wealth
248 HISTORY OF BANKING.
while the commercial bank uses it, and turns it into the channels
of business. The profits of the savings bank, of the mutual kind,
go to the depositors, while the profits of the ordinary commercial
bank go to the stockholders or owners. "The savings bank opens
its doors to savers; it receives and permanently invests money.
The bank opens its doors to borrowers and users of money, for
pay. One serves by receiving and keeping, the other serves by
lending. The savings institution is a receiving reservoir from
little springs; the bank is a distributing reservoir of accumulated
capital.^'
Savings banks in the United States differ from those in
England in not being required to invest their funds exclusively
in government securities. Thus of the $2,600,000,000 on de-
posit in our savings banks in 1900, 30 per cent, was loaned out
on real estate, 18 per cent, invested in state and other stocks
and bonds, 11 per cent, in railroad bonds and stocks, and 3
per cent, in government bonds. While the ordinary discount
bank must keep its funds as free as possible from permanent in-
vestments such as real estate loans, the savings bank pursues
exactly the opposite course, its favorite form of
Investments investment being real estate loans. The savings
bank does not hoard its money. It does not en-
gage in speculation, but makes investments in solid securities
of recognized value.
In the eastern states nearly all of the savings banks are con-
ducted upon the mutual plan. Their capital consists of the
deposits, and the depositors are the owners of the bank. The
business of the bank is managed by a board of trustees who re-
ceive no compensation for their services. The only salaries
paid are to those officers and clerks who give their
Mutual entire time to the business. The income arises
from interest on loans, and after taxes and running
expenses are paid, the net profits go to the depositors as inter-
est or dividends. This system seems to most nearly accomplish
PRIVATE BANKS. 249
the object for which such institutions were formed, as it gives
the depositor the full benefit of whatever profit may arise from
the conduct of the business.
In the western states and on the Pacific coast most of the
savings banks are private institutions, organized and conducted
for the benefit of the owners, the same as other banks, and
paying a fixed rate of interest to depositors. Such institutions
have a fixed capital and maintain a reserve to meet withdrawals
and secure the confidence of the public. They
Private corrcspoud to statc banks, being usually subject
to certain requirements and restrictions of the
state laws, intended for the better security of depositors. Of
course it is largely a question of management whether a savings
bank is secure or not, either by the mutual or private system.
All the law can do is to hedge about the interests of depositors
and place restrictions upon ofiicers. The depositors themselves
must judge as to the ability and integrity displayed in the man-
agement of the institution.
The rules for the conduct of the business differ widely in
different savings banks. Some receive deposits as low as a dime,
while a dollar is the limit in others. Some allow interest only
on the smallest balance of the half year, while others compute
the interest upon monthly balances. Money withdrawn before
the end of the month or half year is not entitled to interest for
the time it was on deposit. Most banks, as a means
Rules of protection to themselves, may require thirty
or sixty days' written notice from depositors be-
fore money can be withdrawn. This regulation is only enforced
in time of panic to enable the bank to realize on its loans or
securities.
TRUST COMPANIES.
During the past twenty-five years there has developed in the
United States a class of financial institutions called Trust Com-
panies, combining the functions of a bank with those of a
250 HISTORY OF BANKING.
fiduciary agent. They receive deposits and make loans, but of
a different character from those of ordinary banks. It is the
policy of conservative banking to make only short
Functfons ^^^^ loaus, and upon collaterals or upon mercan-
tile paper — such as is given for goods sold. Every
commercial bank aims to avoid getting its funds locked up in
fixed property such as real estate, upon which it would be diffi-
cult to realize in case of a financial stringency. On the other
hand, trust companies aim to make long time loans on real
estate or other sound security. Their money consists largely of
trust funds belonging to estates, for which they act as adminis-
trators, executors or assignees, and from the nature of these
deposits they are privileged to loan them out on long terms.
Trust companies act as conservators of those who are not com-
petent to manage their own estates, guardians of minor children
whose estate they may hold until the heirs reach majority, when
it is divided; assignee and receiver in cases of insolvent firms
or corporations, etc. They also act as trustee in corporation
mortgages, and registrar and transfer agent in case of bond
Functions issues by railroads and other large corporations,
of Trust They do a general financial business for bankers
ompanies ^^^ othcrs, collcct rcuts and interest, make invest-
ments, hold titles, pay annuities and execute wills and other
trusts. With the growth of* capital and complications of invest-
ments, trust companies have become important agents in our
financial and commercial system, and are now almost a necessity
in floating bond issues and promoting large enterprises. They
are state institutions, being organized under statutes or special
charters from the legislatures of the states in which they are
located.
Suppose some large enterprise is to be carried through, such
as the building of a railroad, requiring a large capital, much
in excess of that which the managers or promoters of the enter-
prise would be able to furnish of their own. Many other people
TRUST COMPANIES. 351
are able and willing to furnish funds for the enterprise, but at
once the query arises, How do they know that their investment
will be a safe one? How do they know that the company has
been properly organized; that the title to the property is clear
and perfect, and that there has been no over issue of bonds?
Each prospective investor could insist upon investigating the
affairs of the company and having all of these and many other
similar queries answered to his satisfaction before
EnterpHse^" parting with his money, thus making the financing
of the enterprise almost impossible. Just here
the trust company is very serviceable. By assuming the registra-
tion and issue of the bonds, the character of the securities, so
far as genuineness, title, etc., are concerned, is established. The
trust company takes title to the property under the mortgage,
issues the bonds, pays the interest, and in fact transacts the whole
business, turning over the proceeds from the sale of the bonds
as the money is paid in. Purchasers of bonds rely upon the trust
company to see that there has not been an over issue of the
bonds.
Another important service rendered by trust companies is in
issuing stock for large corporations, and in case of sale, making
transfers of same. When the stock is listed on the stock exchange
this is an assurance to buyers that the stock is genuine, and there
has not been an over issue. Then again, it enables purchasers
to have the stock properly transferred without the necessity of
sending the certificates to the headquarters of the company,
which may be a considerable distance away. For instance, a
corporation in Omaha desiring to have its shares listed on the
Chicago Stock Exchange may make an arrangement with a
trust company in Chicago to attend to the registration and
transfer of its stock, as a convenience to buyers, and it is not
then necessary for a buyer to send his certificates to Omaha to be
transferred. That can be done by the trust company here.
CHAPTER XXYI.
BANKING IN THE UNITED STATES.
THE UNITED STATES TREASURY.
As before related. President Jackson removed the government
funds from the United States Bank in 1833, and placed them in
various state banks, located in various parts of the country,
on the plea that the bank was unsafe. This he did, not by
actually removing the money, but by a process which resulted
the same — depositing all fresh receipts of cash in the state
banks and drawing all government warrants for payments of
money against the balance in the United States Bank until that
balance was exhausted. Prior to this time the government
had kept its funds in its own banks, or those which it virtually
controlled, with the exception of an interval of five years (1811-
1816) between the expiration of the charter of the First and
the formation of the Second United States Bank. These gov-
ernment banks had, during a period of nearly forty years (1789
to 1811 and 1816 to 1833) performed two highly useful and
important functions in connection with the financial system of
the country — they had acted as the fiscal agent of the govern-
ment in collecting and disbursing the public revenues, and they
had maintained a uniform standard of value in
the'^eposits ^^^ money of the country. During the period
(1811 to 1816) when there was no government
bank as a "regulator of the currency" the people suffered severely
through the uncertainty of credit and the effects of a depreciated
and fluctuating currency. It was political strife that brought
about the removal of these deposits, and not economic reasons.
The state banks at that time were generally conducted with the
utmost disregard for not only safe banking methods, but very
252
UNITED STATES TREASURY. 353
frequently the principles of honesty as well. They were so far
removed from the direct control of the government that the
finances of the country, when dependent upon them, were left in
a state of uncertainty and demoralization. To make matters
worse the treasury department on September 26, 1833, followed
up the transfer of its deposits by issuing a circular to the deposit
banks in which occurred the following statement: "The deposits
of public money will enable you to afford increased facilities to
commerce, and to extend your accommodations to individuals."
Acting upon the hint, the banks loaned out the government
deposits, the era of speculation set in, the state banks inflated
their currency with greater issues of bank notes, and things ran
riot until the culmination was reached in the panic of 1837.
Nearly all the banks failed. They held $32,000,000 of govern-
ment deposits, a large portion of which was lost.
It then became apparent that the government must keep its
money in its own vaults. Two attempts had been made at the
policy of entrusting them to the state banks (1811-1816 and
1833-1837) and both had proven disastrous. Van Buren was
the president. He was the political heir of General Jackson,
and owed his election largely to the influence of the latter. Ac^
cordingly he shared General Jackson's antagonism to a United
States Bank, and was averse to chartering a third bank, and
yet there was no means available for the safe keeping of the
government funds or the establishment of a stable and uniform
currency except for the government to undertake the matter
Establishment itself. After scvcral years of weary dissensions and
liTTreasurT"^' wraugliug in which the great leaders, Webster,
System Clav, Calhouu and others, participated, in speeches
of the power and brilliancy which usually characterized these
eminent orators, the independent treasury, sometimes called the
sub-treasury system, was worked out, and in August, 1846,
became a law. Thus was begun the policy of the independence
of the government from the banking system of the country. The
864 HISTORY OF BANKING.
"divorce of bank and state" advocated by Jackson 'and urged
by Van Buren had become a fact under Polk. Whatever objec-
tion there may be to the independent treasury system at the
present time, its establishment in 1846 was probably the best
way out of a difficult and perplexing situation.
The law begins by defining the treasury as follows: "The
rooms prepared and provided in the new treasury building, at the
seat of government, for the use of the Treasurer of the United
States ami his assistants and clerks, and occupied by them, and
also the fire-proof vaults and safes erected in said rooms for the
keeping of the public moneys in the possession and under the im-
mediate control of said treasurer, and such other apartments as
are provided for in this act as places of deposit of the public
money, are hereby constituted, and declared to be, the treasury
of the United States." Branches or sub-treasuries were pro-
vided for in the law, to be established in New York, Phila-
delphia, Boston, New Orleans, Charleston and St. Louis, each
under the immediate direction of an assistant treasurer. The
places selected for the location of sub-treasuries were cities in
which the government was presumed to have extensive trans-
actions, either as ports of foreign commerce, or, as in the case
of St. Louis, a convenient point for the sale of the vast domain
of government lands. These were the cities in which the
government deposits had been kept, principally, in the state
banks.
The Independent Treasury Act further provided "That the
treasurer of the United States, the treasurer of the mint of the
United States, the treasurers and those acting as
of the^Act^ such of the various branch mints, all collectors of
the customs, all surveyors of the customs acting
also as collectors, all assistant treasurers, all receivers of public
moneys at the several land offices, all postmasters, and all public
officers of whatsoever character be and they are hereby required
to keep safely, without loaning, using, depositing in banks, or
INDEPENDENT TREASURY ACT. 2«5
exchanging for other funds than as allowed by this act, all the
public money collected by them, or otherwise at any time placed
in their possession or custody." Thus the purpose of the act
clearly was a complete separation of the government finances
from the banking system of the country. Even though the sub-
treasurers and collectors in various parts of the country may
not at first have been provided with suitable vaults or safes
for the safe keeping of the public money, nevertheless they were
expressly prohibited from depositing in the banks. "liaken in
connection with the law authorizing the emission of treasury
notes* as currency, the independent treasury and its branches
became in effect a gigantic bank.
One of the most important features of the Independent Treas-
ury Act was the special clause which required all payments of
public dues and also all disbursements to be made in gold or
silver coin or treasury notes, and all exchanges of funds to be
made upon a gold and silver basis. This clause placed the
country on a specie basis, and kept up a specie circulation which
gave a sound basis to the whole country. All customs, the pro-
ceeds of the sale of public lands and other public dues were paid
in gold, silver or treasury notes, and all disburse-
Specie Clause mcuts f or Salaries of government officials, public
improvements and expenses of the Mexican War
were paid in the same. The Independent Treasury system had a
beneficial effect by restraining the issues of state bank currency.
Considerable difficulty was experienced in transferring funds
from one depository or sub-treasury to another without the aid
of the banks, necessitating the movement of the actual money in
many instances, involving both expense and risk, but a system
of drafts was adopted that worked well.
♦Treasury notes were first issued during tlie years 1812-13-14-15 as a
means of carrying on the war against England. They were again issued
during the panic period, 1837-1843, and again during the Mexican War,
1846-1847. They were usually in denominations of $100, payable to order,
and bore interest.
266 . HISTORY OF BANKING.
The Independent Treasury system seemed to meet every re-
quirement. The Mexican War had been financed successfully by
the government issuing $20,000,000 of interest-bearing treasury
notes at par and contracting a $28,000,000 loan, its bonds com-
manding a premium. Business was good. Foreign commerce
had increased and the fiscal machinery of the new system
seemed to do its work with little friction. In his report of
December, 1856, the Secretary of the Treasury declared "that the
independent treasury, when over trading takes place, gradually
fills its vaults, withdraws the deposits, and, pressing the banks,
the merchants and the dealers, exercises that temperate and
timely control which serves to secure the fortunes of individuals
and preserve the general prosperity." He thus believed that the
Independent Treasury would act as a check on over trading and
a balance wheel to our commercial prosperity — a prediction
which has not been altogether verified by time and experience.
The great crisis in our history, which occurred in 1861,
changed the executive officers of the government and placed at
the helm a class of men who were the political descendants of
the old Whig party, of which Webster and Clay were leaders.
Lincoln and Chase were not so particular to maintain the com-
plete separation of. the Treasury from the banking system, and as
the exigencies of a great war confronted them, they turned at
once to the banks for loans. Between the panic of 1857 and the
outbreak of the war the country had been prosper-
The War Crisis ous, and the bauks had accumulated a strong
specie reserve, while the expenditures of the gov-
ernment during this time had exceeded the revenues and left
the treasury empty, the deficit having been met by bond issues
amounting to $90,000,000. The government needed gold and
the banks had large quantities of it. Accordingly Secretary Chase
in July, 1861, applied to the banks for a loan of $50,000,000.
This was the first friendly act or overture made to the banks
since the "divorce of bank and state" in 1846. It was the first
TREASURY AND THE BANKS. 257
step away from the principle on which the Independent Treas-
ury was founded — the complete separation of the Treasury from
the banking system of the country. Between August 19 and
November 19, 1861, Secretary Chase borrowed over $140,000,000
from the banks.
Loaning their gold reserve to the government, the banks
were unable to redeem their notes, and in December, 1861, were
forced to suspend specie payment. Being sorely pressed for
funds with which to carry on the war, the government had issued
large volumes of "greenbacks," which by a legal provision were
forced upon creditors. Not having a reserve sufficient to support
Suspension ^^^ paper circulation, on January 6, 1862, the
of Specie government also suspended specie payments. Thus
ayments ^^^ "specie clausc," ouc of the most pronounced
features of the Independent Treasury Act, was made of no effect.
Next came the National Banking Act, by which the banking
system of the country was linked to the Treasury Department,
to be controlled by it. Banks were made depositories of public
funds and authorized to act as financial agents of the government
in receiving subscriptions to government loans and the collection
of internal revenue taxes. So close was now the relation be-
tween the banks and the treasury that the law of 1846 had be-
come practically a dead letter, and the very purposes for which
Closer Relation the independent treasury system was established —
Treasury and Separation from the banks and the maintenance
the Banks of specic payments — were both abandoned owing to
the stress of circumstances. By the same act which formed the
national banks the state bank currency was driven out of circula-
tion and the issues of the national bank notes were regulated
and controlled by the treasury. These banks aided the Treasury
in placing and carrying the immense loans necessary to maintain
the armies and fleets in active service for four years. It would
indeed have been very difficult if not impossible for the govern-
ment to carry the war through to its close without the aid and
co-operation of the banks.
258 HISTORY OF BANKING.
The close connection between the Treasury and the banks,
brought about by the exigencies of a great war, have continued
to the present time, and even grown stronger and more intimate
as the financial operations of the government have expanded in
recent years. In 1879 the sub-treasury at New York became a
member of the bank clearing house. This connection with the
banks proved to be very important and valuable
Since the^war ^^ ^^^ government just prior to and during the
period of the resumption of specie payment, in
1879, for it relieved the sub-treasury of the necessity of making
coin payments to any large extent, since the clearing house
agreed to accept legal tender notes in payment of all balances
due from the government to the associated banks. Indeed, if
the Treasury had attempted the resumption of specie payments
at that time without the aid and co-operation of the banks, it is
almost certain that the attempt would have proven a failure
because the banks held the chief supply of gold. Since the
resumption of specie payments the policy of the government
with reference to the Treasury has remained practically un-
changed to the present time. Upon the Treasury depends the
stability of our entire financial system, and upon this largely
depends the prosperity of the nation.
Having now sketched briefly the history of the Independent
Treasury system, we shall proceed to examine into its character
and organization. The Treasury is the agency whereby the
financial operations of the government are carried on. It is the
means by which a uniform standard of value is given to our
currency, a system of coinage is maintained, our banking system
is controlled, and the revenues of the government
S?Trirsu^°^ are collected and disbursed. The Independent
Treasury consists of the Treasury Department at
Washington and nine sub-treasuries, located in Baltimore, Bos-
ton, Chicago, Cincinnati, New Orleans, New York, Philadelphia,
San Francisco and St. Louis. In addition to these the govern-
TREASURY RESERVE. 259
ment has established at various places, where there are no sub-
treasuries, depositories for the receipt and payment of govern-
ment funds.
The United States Treasury holds a reserve of $150,000,000
gold for the purpose of maintaining the credit of the govern-
ment and establishing confidence in its ability to redeem its
paper currency in specie on demand. This reserve supports
obligations equal to nearly ten times its amount, so great is the
faith of the people in the ability and integrity of the government.
The outstanding obligations of the government, which rest in
whole or in part upon this reserve, and are kept on a par with
gold by it, amounted on December 31, 1902, to $1,375,347,166,
as follows:
United States notes (greenbacks) $343,783,541
National bank notes 371,552,495
Silver coin (standard silver dollars) 78,700,912
Silver coin (subsidiary) 93,082,863
Silver certificates 463,304,840
Treasury notes of 1900 24,922,515
Not only are all forms of money in the United States main-
tained upon a uniform gold basis and made interchangeable by
the redemption system of the government, thus causing $1,375,-
347,166 in credit money to circulate as the equivalent of gold, but
the Treasury is constantly redeeming the currency presented to it,
and issuing new bills instead, thus freeing the paper circulation
from old and tattered bills. The government also receives de-
posits of gold coin or bullion and issues certificates against these
in equal amount. Of these there were outstanding on July 1,
1901, $247,036,359, representing that amount of gold in the
vaults of the Treasury.
The business of the nine sub-treasuries consists in receiving
deposits from collectors of customs in the ports of entry, in-
ternal revenue officers, national banks for their annual tax, post-
masters for account of the post office department, also patent
260 HISTORY OF BANKING.
fees, deposits for transfer to other points by banks or other cor-
porations and individuals. The payments consist of pensions to
soldiers and their widows, and the warrants or checks of dis-
bursing officers such as paymasters, quartermasters and others.
All mutilated currency such as United States notes
sub-Trelsuries ^^ bank bills that have become unfit for circula-
tion, are replaced at the sub-treasury free of
charge. United States notes are redeemed in gold, and one
kind of money is exchanged for another. Gold certificates are
issued for deposits of not less than twenty dollars of gold coin.
Silver certificates are issued for silver dollars, and vice versa.
Thus the sub-treasury is a money-receiving, money-paying and
money-exchanging establishment. Its accounts are balanced at
the close of each day and a summarized statement of the day's
business is forwarded to Washington.
Some of our ablest financiers and students of the subject are
now criticising and condemning the Independent Treasury sys-
tem, on the ground that it interferes with the normal operation of
the business interests of the country. The principal objection
lies in the fact that it locks up in the sub-treasuries large
volumes of money in the form of customs at certain times or
seasons, thus contracting the money in circulation, when the
business interests of the country may require all the circulating
medium. Prof. David Kinley, in criticising the system, says:
"The action of the Independent Treasury is such as to vary the
amount of money in circulation. At one time it absorbs, at
another disburses, considerable sums. There is nothing in the
nature of the sub-treasury that makes its receipts and payments
necessarily concomitant with a free and stringent condition of
the money market respectively." Its action is independent of
the money market. Were it possible that the Independent Treas-
ury could absorb and withhold funds when not needed in busi-
ness channels, and disburse it freely when business interests
required a larger circulating medium, it would afford elasticity
THE SUB-TREASURIES. 261
to the currency and prove a great benefit, but unfortunately it is
liable to act in exactly the opposite direction, and thus aggravate
the money stringency. Then the Secretary of the Treasury must
needs go outside of the law and use his prerogatives to assist
the financial interests of the country by the purchase of bonds
so as to release some portion of the money in the Treasury for
general circulation and use.
By withholding money from circulation as the Treasury
does at times, the effect is to lower prices of commodities gen-
erally, and at other times large disbursements by the Treasury
tend to raise prices by making money more plentiful, thus in both
instances unsettling values, to a slight extent. The remedy
advocated is to abolish the sub-treasuries and deposit the govern-
ment funds with the national banks, where it can be used in the
channels of trade and commerce.
BANK CLEARING HOUSE.
CHAPTER XXVII.
SETTLEMENTS BETWEEN BANKS.
HISTORY; OBJECT; METHODS; CLEARING HOUSE CERTIFICATES.
The original idea of a clearing house was an institution de-
signed to facilitate the settlement of daily balances due to and
from a number of banks. It is thus a labor saving device,
arising from the payment of checks on each other, and the
transaction of other business. It would be almost, if not quite,
impossible to transact the volume of business
Object which daily passes through our banks were it not
for this ingenious institution. In the New York
clearing nouse alone the daily clearings frequently run above
$300,000,000, and this vast volume of business is settled by the
payment of about five per cent, of actual money as balances.
The scheme of the clearing house is merely to offset one debit
against another credit. Were there but one bank in New York,
no clearing house would be necessary, since the debits and
credits would be offset against each other on the books of the
bank and one indebtedness would cancel another, to a large
extent, but where there are numerous banks and vast numbers
of checks to be settled, the clearing house effects an enormous
saving by bringing them together. The clearing house with its
gigantic operations cancels obligations arising between banks,
the same as the banks do for the individuals composing a busi-
ness community.
The use of checks and drafts in the transaction of business
has grown in this country to a very wide limit, much in excess
362
USE -OF SUBSTITUTES FOR MONEY. 263
of their use in any other country, and as the United States
becomes older and better banking facilities are provided, people
are gradually educated to the use of commercial
andDrafir^* paper, and the volume of actual money — coin
or paper currency — as compared to the volume of
business transacted, grows proportionately less. The increase
in the use of checks and drafts has more than kept pace with
the increase in the volume of business of the country, hence the
volume of actual cash in circulation has grown proportionately
smaller. Again the proportion of checks and drafts to money
is less in the parts of the country distant from the money centers
and in small towns where banks are scarce. Such communities
need more money in proportion to the volume of business done,
and must have the ready cash in hand to cover the numerous
small transactions occurring. But in the large cities and great
money centers of the country substitutes for money in the form
of commercial paper are more extensively used, and the transfer
of credits upon the books of the banks constitutes the method
of payment in a large proportion of instances. The clearing
house encourages and facilitates the use of Substitutes for money
by furnishing a safer and more convenient method for settling
exchanges between banks.
The first clearing house was organized in London about 1775,
and for three-quarters of a century it and the one established
in Edinburgh soon after remained the only organizations of the
kind. Prior to the establishment of the London clearing house
the Bank of England served as a means of making settlements,
and besides the people were not accustomed to the nse of bank
checks in making payments, as at^he present time. The New
York clearing house was established in 1853, Bos-
History ton in 1856, Philadelphia in 1858, and Chicago in
1865. The clearing house is therefore a com-
paratively recent institution. Every considerable city where
banks are numerous now has its clearing house, and the total
264 BANK CLEARING HOUSE:
annual clearings of the United States mount up to fabulous
figures.
A room of suitable size to accommodate the volume of busi-
ness, quiet and centrally located, is the first consideration. The
furniture consists usually of a counter or desks over which the
settlements are to be made. Each bank, member
Clearing" °^ ^^® associatiou, scuds to the clearing room at
the precise hour appointed two clerks, one of whom
holds the exchanges of the previous day, including also items
received in the morning's mail. These are all listed and those
against each bank kept separate. At the tap of the manager's
bell a clerk from each bank takes his position behind the coun-
ter and opposite him his companion from the same bank. A
given signal and all of the clerks outside the counter move for-
ward to a point opposite the next clerk, pass the exchanges be-
longing to the bank represented by that clerk over the counter,
take a receipt for them, and then with a concerted movement
all pass to the next. When the clerks on the outer side of the
counter have made their rounds and delivered their exchanges
they return to their several banks, carrying with them the checks
received from other banks, while the settling clerks remain to
cast up the columns and ascertain whether their several banks
are debtor or creditor, whether they are to receive or must pay
a balance into the clearing house. As each clerk completes his
calculations he reports the result to the manager, and when all
have finished, and the totals agree, the clerks are dismissed.
The total of the debits against the debtor banks must equal
the total of the credits in favor of the creditor banks, on the
theory that every debit has a corresponding credit. A bank
cannot know until its settling clerk returns whether it has a
balance in its favor or is owing the clearing house and how much.
It may be a creditor one day and a debtor the next. Its officials
naturally hope for a favorable balance, for that indicates a
temporary increase in its line of deposits. But if the balance is
CLEARING HOUSE BALANCES. 265
against the bank it must be prepared to meet it promptly at the
appointed hour. The payment of balances by the debtor banks
takes place at perhaps an hour after the exchanges
BrianMs°*°*^ have been made, a receipt being taken in every
case in the regular way. Messengers from the
creditor banks call later to receive the balances due their banks.
The kind of money used in the payment of these balances is
regulated by the rules of the associations, but is usually gold
coin and currency. Silver is permitted in restricted quantities
in some associations, but owing to its bulk it is not well suited
to large payments. The rules of some associations require
the money paid in to be assorted and put up in packages of
$5,000, on which is marked the number of the bank, as a guar-
antee of the correctness of the count.
The management of a clearing house association is usually
vested in a board of officers consisting of a president, vice presi-
dent, secretary, treasurer, manager and a clearing house commit-
tee. In small cities this list of officers is sometimes curtailed
by omitting the office of vice president and secretary and com-
bining the duties of the latter with those of manager. The
duties of the officers are such as usually appertain
Management to similar officcs in Corporations, with the excep-
tion of the manager, who has charge of the clear-
ings and is the principal executive officer of the association.
The clearing house committee is usually composed of three of
the most capable bankers in the association, elected annually by
the members. This committee has almost absolute authority,
being in effect a board of directors. It decides upon the admis-
sion of new members, suspension of members when expedient,
makes rules for the management of the association, and in gen-
eral directs its business.
While the first and primary object of a clearing house is
the settlement of exchanges between banks, its functions are not
confined to this. By association many benefits have been derived
266 BANK CLEARING HOUSE.
by the banks not contemplated in the original intent, and the
tendency has been, in recent years, to include in the scope of the
clearing houses many questions of policy and prac-
Functions tice affecting the banks and the business com-
munity. The most important functions of
the clearing house, beyond that of effecting exchanges, is summed
up by Cannon in his "Clearinghouses," as follows: "1. The
extending of loans to the government. 2. Mutual assistance of
members. 3. Fixing uniform rates on deposits. 4. Fixing uni-
form rates of exchange and of charges on collections. 5. The
issue of clearing house loan certificates." In case a member is
found to be in financial straits owing to a panic or false rumor,
causing a run of depositors, and is unable to convert its assets
into cash with sufficient rapidity to meet its demands, the clear-
ing house committee will examine into its condition, and if its
assets are found to be ample and good, and its management not
seriously defective, it will extend temporary aid until the strain
is relaxed. If the member, however, is addicted to objectionable
methods in management the committee will not go far out of its
way to lend saving help, preferring to get rid in this way of a
weak and ill managed member.
By fixing the rates of interest on deposits, rates for collection
and exchange, etc., the committee takes away the incentive of
banks to compete against each other in these particulars — a
practice which might lead to improper and unsafe banking.
Eate cutting is especially objectionable in the banking business.
But probably the most important function exercised by the
clearing house is the issuance of loan certificates. These are
given for temporary loans, usually consisting of good assets, made
by members to the association and are receivable
certmcat^s°"''' for balances due to other members. The first cer-
tificates were issued by the New York clearing
house at the opening of the Civil War, and were necessitated
by the general decline and shrinkage in bank deposits and loans
CLEARING HOUSE CERTIFICATES. 267
consequent upon the uncertainty attending the election of
Lincoln to the presidency. The New York clearing house met
and passed the following resolution:
"In order to enable the banks of the city of New York to
expand their loans and discounts, and also for the purpose of
facilitating the settlement of exchanges between banks, it is
proposed that any bank in the Clearing House Association may,
at its option, deposit with a committee of five persons — to be
appointed for that purpose — an amount of its bills receivable.
United States stocks, treasury notes or stocks of the State of
New York, to be approved by said committee, who shall be
authorized to issue thereon to the said depositing bank certifi-
cates of deposit bearing interest at seven per cent, per annum,
in denominations of $5,000 and $10,000 each as may be desired,
to an amount equal to seventy-five per cent, of such deposits.
These certificates may be used in the settlement of balances at
the clearing house for a period of thirty days from the date
thereof, and they shall be received by creditor banks during that
period, daily, in the same proportion as they bear to the aggre-
gate amount of the debtor balances paid at the clearing house.
The interest which may accrue upon these certificates shall, at
the expiration of thirty days, be apportioned among the banks
which shall have held them during the time."
Several times during the Civil War the New York clearing
house resorted to the use of certificates as a means of relieving
the financial stringency, and the effect in each case was decidedly
beneficial. Banks were thus enabled to discount commercial
paper and make loans to relieve business firms which were per-
fectly safe and solvent, but in distress, and the business situation
at once felt the brightening effects of the policy. Clearing house
certificates to the extent of $22,000,000 were in circulation among
the banks of New York in 1862, and this was equivalent to a vast
increase in the volume of money in circulation. Again during
the panic of 1873 the same course was pursued and about $26,-
2G8 BANK CLEARING HOUSE.
000,000 in certificates were issued by the New York clearing
house. Other cities seeing the benefits of the system, adopted
it, and issued certificates for temporary relief, thus greatly reliev-
ing the severity of the memorable panic of 1873, which extended
over the entire country and resulted in severe hardships.
In 1893 a panic of unusual severity spread over the United
States. Banks were forced to close and business houses were
pushed to the wall. Under the restrictions of the national bank-
ing law it was impossible to secure relief by an increase in national
bank notes in time to save the people from the dis-
Panic of 1893 astcrs which follow in the wake of a financial storm.
Banks in the small cities and towns drew heavily
against their deposits in the large cities and money centers,
especially New York, and it became necessary for the financial
institutions, chiefiy in New York, to find a means of staying
the force of the panic. The most potent factor in this relief
was the clearing house certificates issued by the associations of
New York and other cities. Forty-one million dollars of these
certificates were issued by the clearing house committee, based
upon the deposits of securities by various banks of New York.
Other cities pursued the same plan, and the amount of bank
money was thereby suddenly increased throughout the country
to the extent of perhaps $150,000,000, greatly to the relief of
business interests generally.
What is and what is not proper matter for clearing depends
upon the rules of each particular association, and these are by
no means uniform on this point. The following paragraph ap-
pears in the rules of a western clearing house: "Proper matter
for clearing shall consist of checks, drafts, manager's certifi-
cates, certificates of deposit, either demand or ma-
ciearing°'* tured, and any other matter specially agreed upon,
until notice is given to the contrary, and any bank
clearing paper not proper shall be fined." In some associations
notes and drafts are not sent through the clearings, while
MATTER FOR CLEARING. 269
in others they may be cleared. The general rule seems to be
that only such items as upon their face are unconditional de-
mands upon a bank, for payment, are proper material for clear-
ing. Some associations keep near this rule, while others seem to
broaden it to the full limit of expediency.
The clearing house associations in a number of the large
cities have enacted rules forbidding matter to be cleared which
bears a restrictive endorsement. It was formerly the custom
for depositors to endorse "For Deposit," "For Account of," "For
Collection," etc., above the name of the depositor,
End^oislments ^^^^ intending to transfer possession but not title
to the paper. This is now forbidden, as a measure
of self-protection, by many large associations, unless the clear-
ing bank specially guarantees the paper. Paper then to pass
through the clearing house should be endorsed either in blank
or full, as "Pay or order." Before sending its ex-
changes to the clearing house, each bank stamps a receipt upon
the back of each item, with its number, and the words, "Re-
ceived payment through the clearing house." or
otherwise, as the rules of the association prescribe. This in-
dorsement though made unofficially and by means of a rubber
stamp, is regarded as authentic, and guarantees all previous
indorsements After the clearings are made, items which are not
honored by the bank on which they are drawn are returned by
messenger and "bought back" by the bank through which they
were cleared.
Banks and trust companies not members of the clearing house
association may clear through a member-bank, but the latter is
liable to the association for such exchanges the same as for its
own, and they usually exact proper security as well as compensa-
tion from the bank or trust company for performing the service.
In Boston the clearing house association has put in operation a
system for collecting checks on out-of-town banks which is
certainly a material saving in expense as well as labor. Instead
270 BANK CLEARING HOUSE.
of each bank collecting its out-of-town checks, these are all sent
to the clearing house at a fixed hour daily and there assorted- by-
towns and banks. All of the checks on each country bank are
Non-members ^^^^ listed and forwarded to that bank in one
and Country package. This is a decided advantage also to the
^^^^ country bank, since payment can be made to the
Boston clearing house for all of these checks at one time, in-
stead of having to remit to several different banks. The remit-
tances are then put through the regular clearings by the
manager of the clearing house, very much the same as other
items.
No doubt the clearing house, which was originally intended
merely as a labor and time saving device, and which has since
developed into an important factor in our financial system,
assuming new functions from time to time, will further expand
and add to the efficiency of the financial machinery of our
country. In his valuable treatise on clearing houses, Mr. James
G. Cannon, president of the Fourth National Bank of New
York, says: "Clearing houses are gradually becoming a welding
force that ultimately will bring to the banking business of this
country the centralization which it so greatly needs. In the
Clearing- course of time rates for money in the United States
houses of the will bccomc morc and more on a par with those
prevailing in European money centers, and then
the clearing houses of the various financial centers of this country
will be obliged to undertake functions which as yet they have
only discussed.'^
BORROWING AND LENDING MONEY.
CHAPTER XXVIII.
THE USE OP CREDIT.
THE MONEY MARKET; CALL LOANS; COLLATERALS;
NOTE BROKERS.
Business men must borrow money. With rare exceptions
every firm and corporation in the regular course of business
must at times resort to the money lender. Credit lies at the
foundation of our financial and commercial systems, and it is
prudent business policy to use credit within proper limits. When
a firm can earn more than the ruling rate of interest upon capital
employed, after safely making allowance for all expenses and
hazards, it may prudently use borrowed money as a part of its
working capital. Suppose a firm with $100,000 capital turns its
capital over six times a year and makes a net profit of 2J per
cent, each time. Its yearly profits then would be $15,000. If
now it can extend its business in the same proportion it can
afford to borrow, say $50,000 at 6 per cent, interest to increase
its working capital. Its profits would then amount to $22,500,
from which deduct $3,000 interest, and we have a net profit of
$19,500, or nearly 20 per cent, upon the capital of the firm.
The constant general tendency of prices of merchandise is
downward. Competition tends to reduce prices and lessen profits.
To offset these diminishing profits, firms aim to
Borrow\*ng^°' ^° ^ larger volume of business and make the ex-
pense proportionately less. This requires greater
capital to introduce improved machinery, put more sales-
men on the road, or otherwise improve the facilities of the house,
37X
272 BORROWING AND LENDING MONEY.
and acts as an incentive to the firm to resort to the money
lender.
As a country grows older and the surplus earnings of the
people are carried over from year to year, there is an in-
creased amount of money seeking borrowers, and competition
of money against money tends to reduce the rate of interest, thus
enabling borrowers to meet the falling market prices of their
wares and yet pay the ruling rate of interest for borrowed
capital. The machinery for massing capital, such as the savings
banks which gather up the little rivulets of wealth.
Lenders trust Companies, insurance companies and banks,
becomes more numerous and efficient and the
knowledge of the conditions of financial safety in business, such
as reports on the credit of firms and corporations, also becomes
more thorough and reliable, so that the whole process of borrow-
ing and lending in business is facilitated and made less hazardous.
To take advantage of these trade forces and use them properly
is the province of the financier.
The inexorable law of supply and demand obtains in the
money market the same as in other things. Money is, a com-
modity, and at times it is in greater demand than at others, the
same as other commodities. Supply and demand, as they affect
the money centers, affect the entire money market to a greater
or less degree. Thus a "tightness" of money in Wall Street,
or an unusual demand for money there, causes a rise in the rate
of interest, and money at once flows to New York, perhaps
causing a rise in the rate of interest through the
Market*"*^ couutry. In the agricultural districts of the West,
when the great crops of corn and wheat must be
carried to market in the autumn, a large amount of money is
needed, and the banks aim to so time their loans as to have a
good supply on hand at that time. In the sugar and cotton
districts of the South the crops are ready for market in December
and January, and these make a profitable demand for money.
THE MONEY MARKET. 273
In the states where wool is extensivdy raised, the time of the
wool clip in the spring brings need for an increased volume of
money, and thus the law of demand and supply affects the money
market and regulates the rate of interest, the same as it affects
other commodities.
The largest borrowers of money are the great corporations
and syndicates which aim to secure in this way a portion of the
capital which they require at a low rate of interest and use it at
a profit to themselves. Instead of issuing commercial paper, as
in the case of firms, their borrowings are evidenced by bonds
secured by a mortgage upon the property of the company.
These bonds are sold to the public generally in large or small
quantities. A company earning six per cent, on its stock could
sell bonds to the amount of half its capital on a
basis of five per cent, interest, and thus on the same earn-
ings, pay seven per cent, dividends on its capital stock. This
is a legitimate proceeding and affords a gain which the officers
of any corporation may rightfully take advantage
Corporations of. While the bonds of large corporations are sold
to the public generally, those of small corporations
seldom reach the public. Such companies borrow from
the banks chiefly, like firms and individuals, and owing to the
limited liability of the stockholders for the debts of the company,
the banks frequently require in addition to the obligation of the
corporation a personal guaranty from the officers. This gives the
bank a claim not only against the assets of the company in case
the loan is not paid, but also against the officers personally.
The precise limit up to which a corporation or firm may
properly borrow is hard to define. It is very close to that point
at which its paper floats at par drawing ordinary
BoTrowLg interest. When a concern must sell its paper at a
heavy discount, it is evidence that it is over bor-
rowing. In order to hold its bonds at par companies sometimes
offer a higher rate of interest than the usual rate. But this is a
274 BORROWING AND LENDING MONEY.
public confession of the weakness of the paper. Occasionally
a corporation will issue bonds bearing a low rate of interest and
sell them below par. This is questionable financiering, since the
face value of the bonds must be paid at maturity. Thus a
corporation desiring to raise $1,000,000 issues bonds bearing
4 per cent, and sells them at 80. In order to realize the amount
of cash needed, viz., $1,000,000, it must issue $1,250,000 of
bonds, and at maturity these must be paid. This is equivalent
to paying a bonus of $250,000 on the sale of its bonds. It is an.
example of that human tendency to postpone troubles, or re-
lieve the present by borrowing from the future. We may
therefore conclude that to issue bonds or other obligations at
too high a rate of interest, or sell them at a discount, is a viola-
tion of the rules of good financiering and indicates over borrow-
ing. With individuals or firms it may be said that a concern
should not, under ordinary conditions, borrow more than half its
net worth.
The great money lenders are, of course, the banks. Borrow-
ers are a necessity to a bank, and it will loan to responsible
borrowers to any reasonable and proper limit. Bank loans are
i^ade chiefly by discounting paper for depositors. Notes and
acceptances running ninety days or less, given for the sale of
merchandise, and hence representing the value of goods or other
property bought or sold, is a desirable class of paper for discount.
The value is behind such paper, and it may be said to represent
the property. A customer of a bank need not hesitate to offer
for discount any paper of this class which is, in his opinion^
Desirable g^^d, but ou the other hand he should not be
Paper for offeuded if his banker refuses to discount the
Bank Discount p^per, evcu without giving reasons. The banker
may be in possession of information concerning the other parties
to the paper which the holder is not, and yet cannot disclose that
information. Every customer of a bank who keeps an account
of any consequence is considered as entitled to a "line of dis-
BANK LOANS. 275
count" in proportion to his usual balance in the bank and finan-
cial standing in general. The limit of this "line" is agreed upon
with the bank officials from time to time, and the customer sends
in for discount such notes and drafts as*he may have which he
regards as good up to the limit of his "line."
Banks aim to have diversified borrowers. By this is meant
those in various lines of business, whose needs come at different
times of the year. If the bank had all one class of borrowers
they would all want their money at the same time; also at that
time draw down their deposits, and the bank would find itself
without the necessary funds to advance. In order that the bank
may at all times be ready to meet the demands of its customers,
it aims to have a volume of money loaned to persons having
no "line of credit" and whom the bank can ask
Call Loans to retire their indebtedness on short notice. In
large cities some banks have from 25 to 50 per
cent, of their loans made to borrowers who do not deposit with
the bank, and to whom the bank is under no obligations to
extend the loan for any definite period of time. Such loans are
made to stock brokers, and are usually payable on demand.
If a business man borrows of a bank a sum of money on his
note, and gives as security a pledge in the form of other notes,
shares of stocks or bonds, such pledge is called "collateral." The
collateral does not become the property of the bank, and the
bank is responsible for its safe keeping and return to the owner.
Loans on collateral are usually evidenced by notes in which a
clause is inserted giving the bank the right, in case there is
default in the payment of the note, to sell the
couaterri Collateral and apply the proceeds of such sale to
the liquidation of the note, the residue, if any, to
be returned to the owner or debtor. The trend of the times is
for banks to loan on collaterals and less on the individual notes of
borrowers, but there are cases where collaterals cannot be readily
furnished. The merchant has a stock of goods upon his shelves
276 BORROWING AND LENDING MONEY.
but this cannot be placed in the vaults of banks, like stocks or
bonds. But merchants and others who borrow on individual
notes are required from time to time to furnish their banks
with statements of their financial condition, drawn from their
books. The experienced banker is not only able to read and
interpret this statement, but reads between the lines the future
of the business, and advances credit accordingly. In case interest
coupons attached to collaterals mature while in possession of the
bank the owner is usually allowed to collect or cash them.
Collaterals as security depend upon their character. The highest
quality of collaterals is United States bonds, and from this
their value descends to almost nothing. Banks aim to leave
a liberal margin below the market value of any collateral, so as to
realize the amount of their loan in case of forced sale. Many
classes of collaterals are shifting in value and of varying degrees
of security. The banks will exercise care to see that the party is
not borrowing too much, and that the bank is not getting a large
part of its assets tied up in one class of securities.
It is a good rule that all firms should be out of debt at least
once a year, and better, twice yearly; otherwise the banker,
through his loans, supplies in fact a part of the capital to the
concern, becoming a silent partner with no share in the profits,
and every chance to make a loss. This does not apply to stock
brokers, who borrow entirely on collaterals, and who use their
money to carry their customers. They are constantly in the
market for loans, which they secure for their patrons, enabling
Loans for them to buy and sell various stocks and bonds
Speculative in which they expect to realize a profit. Oc-
Purposes casioually in New York, Chicago and other large
cities speculation runs very high, and many men having good
business become interested in the stock market, and unbeknown
to their bankers and friends carry stocks on a margin with
some broker, who is perchance borrowing the money for him at
the broker's bank. Such practices on the part of business men,
DOCUMENTARY BILLS. 277
if discovered, will seriously injure their credit, and bankers are
ever on the alert to discover a customer who is speculating, and
to discountenance the operation.
When property is on its way to market with a certainty or
probability of early sale, it is a legitimate object on which banks
loan as collateral. In fact one of the chief functions of a bank
is to bridge over the period of time between production and
consumption. When merchandise is shipped for sale either in
the home or foreign market, bills of exchange are drawn upon the
consignee, and if accompanied by a specific pledge of the prop-
erty in the form of a bill of lading, are called
Documentary ^^documentary bills." A very large part of the
grain, live stock and cotton of the country is car-
ried to market in this manner. The property is protected by
insurance in favor of "whom it may concern," and the bank, by
holding possession of the documents, holds title to the property
until the draft is paid.
Another form of collateral used extensively in business as
security for bank loans is warehouse receipts. Produce or other
property may be withheld from market for a better price, and
while being so held it is placed in a warehouse and the regular
form of warehouse receipt taken for it. This receipt then may be
used as collateral to a note for discount at bank.
R^cetpt^s"^* It represents the property and carries constructive
possession of the property with it. No one can
withdraw the produce or other property from the warehouse
without showing the receipt properly endorsed. Loans on this
class of collaterals are not, however, regarded with much favor
by banks, since the time which the property is to be held in store
is indefinite, and the market value is uncertain, making the
loan indefinite as to time of payment, and the security liable to
fluctuation. Loans of this character are accommodation loans
and often have to be inconveniently prolonged.
Accommodation paper consists of notes or drafts made or
278 BORROWING AND LENDING MONEY.
signed for the express purpose of securing a loan, and do not
represent a bona fide business transaction. Sometimes the ac-
commodation consists only of an endorsement upon a note or
draft created by the person who desires the accom-
«onTapef ^' modatiou; it may consist of the acceptance of a
draft. But whatever form accommodation paper
may assume, banks and money lenders do not regard it favorably.
It is not regarded as legitimate business paper like the draft or
note executed on the basis of a sale of goods. Accommodation
paper can be collected legally, for the law protects the bank or
any other innocent third party who takes the paper in the
ordinary course of business, without knowing its want of con-
sideration between the original parties, and the obligator to
such paper must pay. This protection of third parties to com-
mercial paper is a necessary safeguard to enable it to be readily
sold and transferred. Accommodation notes and accommodation
endorsements are not as common in this generation as in the
past. Many an old man plods along to-day, poor, but wiser for
his experience in endorsing paper for a friend, perhaps many
years ago. That one fatal act reduced him to penury, from which
he was never able to recover. Business men of to-day have
learned to conduct transactions upon safer and better methods,
perhaps owing to the experience and good advice of their fathers.
A class of dealers in commercial paper called note brokers
handle considerable paper of merchants and manufacturers, and
re-discount with the banks. The note broker is a convenience
to both the merchant and bank — to the former by buying his
paper and thus furnishing him with funds which he may need
in his business — to the bank by selling paper to it whereby it is
enabled to employ its capital profitably when there
Note Brokers is a lack of applications for discounts from its
regular customers. Merchants can afford to sell
their paper at 6 per cent, interest to a note broker, and discount
their own bills at 1 per cent, per month, or better. The question
UNIVERi^lTY
Of
J
NOTE BROKERS. 279
arises at once, why does not the merchant sell his paper to his
bank directly, instead of selling it in the "street," and will not
his banker grant the merchant all the credit he is really entitled
to, and discount all of the paper his capital and financial standing
will justify him in uttering? It may not. The bank may have
its funds loaned out up to the limit and be practically unable
to buy the merchant's paper, even if desirable, while some other
bank might be short of good paper. The note broker, as a sort
of go-between, can sell the paper wherever there is a demand for
it. He may sell it in another town or city where there is a sur-
plus of deposits and a dearth of loans. In some localities the
banking capital is much larger than can be profitably employed
in the immediate vicinity, and consequently those banks invest
large sums through note brokers.
Then again a bank may contract its loans at any time by
selling notes previously purchased from a note broker. Such
notes are usually made payable to the order of the firm or indi-
vidual signing them and then endorsed in blank. To sell this
paper does not require the bank's endorsement, and it can be
sold again through the same class of brokers as purchased from.
When a bank makes a loan to one of its depositors, the note is
usually made payable to the order of the bank, and it is not
customary, except in cases of great need on the part of the bank,
to have this paper go out of its possession. Business men who
borrow of a bank do not ordinarily wish the bank to let the
paper go out of its possession.
The making and selling of one's paper in the market, outside
of one's bank, and free from the wholesome restraint which a
bank exercises upon the inclination of a class of depositors to
borrow beyond their proper limit, is a method of business which
is fraught with danger and liable to abuses. In
the^syltem prospcrous timcs it is apt to lead to over trading
or to speculation. Funds obtained in this way can
be used for any purpose, and are often applied to other uses
than the discounting of merchandise bills.
280 BORKOWINC; AND LENDING MONEY.
As a rule note brokers merely transfer the paper without
guaranteeing its payment by endorsement. While the broker is
not legally liable in ease the maker fails to pay, yet his business
success depends upon the manner in which the notes are paid,
and he is, therefore, exceedingly anxious that they should be
paid promptly at maturity. He is considered a guarantor that
Responsibility ^^® uotcs are all right in every respect, except as
of the to whether they will be paid or not, and of that the
bank or buyer is presumed to be equally capable
of judging. The note broker must make no misrepresentations
in order to sell his paper. His dealings with the buyer of his
paper require the utmost good faith on his part. He sends a
printed list containing a description of perhaps a hundred notes
to the bank. Each note is numbered and if the bank wishes to
see any of the paper, it is sent upon application. Or a broker
or an agent for him may visit a bank personally and exhibit a list
of the notes and acceptances which he wishes to negotiate.
Loans on real estate security are considered a desirable class,
where the intention is to put out the money for a long time.
The lender usually does not aim to loan a larger amount than
one-half or two-thirds the value of the property, leaving a good
margin as an inducement to the debtor to repay the loan, rather
than default. Loans on real estate are evidenced by a special
form of note, and secured by either a mortgage or trust deed.
A mortgage is a conveyance of the property to the creditor with
the condition that if the debt is paid the conveyance becomes
void. It is similar in many respects to a deed.
Loans ^^^^^^ with a Conditional clause. A trust deed is a con-
veyance of the property to some third party called
a trustee in trust as security for the debt. When the debt is paid,
the trustee executes a release of the conveyance; that is, deeds
the property back to the owner. Before loaning money on real
estate security, the lender must satisfy himself not only as to the
value of the property and its desirability as security for the pro-
KEAL ESTATE LOANS. 281
posed loan, but he should have the title examined by a eompetent
attorney. An abstract of title containing a history of the con-
veyances through which the title has passed will be furnished
by an abstract company.* Having found the title clear and
satisfactory and no judgment against the mortgagor, the mort-
gage or trust deed may be executed and the loan made, but no
time must be lost in getting the mortgage on record in the office
of the recorder of deeds of the county where the property is
situated. t The object of recording is to give notice of the ex-
istence of the mortgage to any one who might wish to purchase
the property or take a mortgage upon it. There may be several
mortgages on the same property, the first being entitled to prior-
ity of payment, then the second, and so on. In case the debt is
not paid at maturity the holder of the mortgage has a right to
foreclose and have the property sold at judicial sale, the residue,
if any, after paying the debt, interest and costs, to be returned
to the mortgagor. After sale, the mortgagor has a period in
which he is allowed to redeem the property (usually about fifteen
months) by paying up the debt and all costs, etc., but failing in
this the sale becomes absolute. As to the special provisions of
the law in regard to mortgages or trust deeds, their foreclosure,
etc., the statutes of the state should be consulted. In case
the security for a loan consists of both land and buildings it is
usual for the mortgagor to have the latter insured for the benefit
of the mortgagee.
*We now have title guaranty companies who guarantee or Insure the
mortgagee against loss by any defect of title in the property. They are a
species of insurance company, and their guaranty policies are extensively
accepted.
tThe best method is to execute the mortgage or trust deed and place it
upon record before the abstract of title is brought down to date. Then when
the abstract is continued it will contain the mortgage or trust deed and
show the contiQuity of title up to the moment of the loan.
CORPORATIONS,
CHAPTEE XXIX.
CHARACTER OF CORPORATIONS.
FORMATION; PROMOTION; KINDS OF STOCK; WATERING STOCK;
DIVIDENDS.
A corporation is an artificial person created by law. It is a
personage entirely distinct from the individuals who form it or
conduct its affairs. Its members may all die and be succeeded
by others, but its existence is not affected thereby. It continues
on indefinitely or until its charter expires, or is forfeited or
surrendered. Corporations are of two kinds, public and private.
Public corporations are such as are created for public purposes,
viz., cities, towns, libraries, hospitals, etc. Private corporations
are such as are conducted for private purposes and for the benefit
of those directly connected therewith, as railroad, bank, insur-
ance, manufacturing and mercantile corporations.
Definition In the casc of public corporations every citizen is
a member of the corporation. In the case of
private corporations only those are members who own shares
of stock. A close corporation is one with a limited membership,
no stock for sale to the public and vacancies filled by selection,
the prime object being to keep the profits of the company within
a small circle or family and immediate connections. Many of
the most profitable business corporations are conducted in
this way.
One of the primary reasons why a corporation, rather than a
co-partnership, is preferred by those intending to embark in an
enterprise is that when the capital stock is paid for by the
282
FORMATION OF CORPORATIONS. 288
stockholders there is no further individual liability for debts
and obligations of the corporation, and in ease of insolvency and
failure of the corporation, their loss is but the amount they
have already invested when they subscribe to their shares of
stock. If the stock is not fully paid up, the stockholder is
liable to creditors and the corporation for the unpaid balance,
while in a co-partnership business, conducted by individuals, each
individual is personally liable for the entire obligations of the
co-partnership of which he is a member.
Another reason for preferring a corporation to a co-partner-
ship is the facility it affords for procuring investments by the
public, who, by reason of the segregation of the entire capital
into numerous small shares, are enabled to make an investment
of such amount as the individuals desire. This method enables
'jwganizers and promoters to enlist in their enterprises the capital
of a multitude of investors, large and small, which they would
be unable to interest without such form of organization.
Corporations are creatures of the state, and are formed
either by special charter or compliance with the requirements of
a general statute. At the beginning of the century all corpora-
tions in this country were formed by special char-
Promotion ^^^' ^^^ owiug to the corruptiou and bribery re-
sorted to in order to get charters passed through
the legislatures of the several states, containing favorable terms
and granting valuable privileges and monopolies, the constitu-
tions of most all of our states have been amended so as to
prohibit the legislatures from granting special charters. Many
corporations are formed for the purpose of conducting an or-
dinary business in competition with other houses, as banks,
railroads, etc., or for buying out or "taking over" established
concerns, while others are formed especially to develop or pro-
mote a particular franchise, invention or discovery. In the
latter case the value of the shares is largely fictitious, being
based upon the estimated future profits of the company. A
284 CORPORATIONS.
large portion of the capital stock goes to the inventor or dis-
coverer or promoter of the enterprise, as payment for his
services, and the rest is sold to the public, usually at a very low
price at first, and an increasing price as fast as the stock will
sell. It is in the formation and promotion of corporations that
serious evils and abuses have grown up in this country. Fraudu-
lent prospectuses are issued by skillful "promoters" versed in all
the arts by which stock is sold, representing that the enterprise
is fully afloat and the stock paid up, when in fact it has been
"paid up" only by worthless patents, or property purchased
at a gross over-valuation. The number of "bubbles" which are
floated every year, and in which the inexperienced and unwary
lose their savings, is astounding. In England this evil became
so great that in 1867 a law was passed requiring a public registry
of all contracts whereby stock was issued by a corporation in pay-
ment for any franchise or other property. Investigators claim
that over speculation is largely due to the formation of corpora-
tions that have no real excuse for existence, except the further-
ance of the personal aims of the promoters. The fullest possible
publicity concerning the initial acts of every new company is
believed to be the only remedy for the existing evils.
It frequently occurs that subscribing stockholders are not
required to pay the full amount of their stock upon subscrip-
tion, or when it is issued, but that the balance that may be due
the corporation is subject to the "call" of the
subSrip\kms directors. The usual penalty imposed upon the
stockholders for failure to respond to the "call"
is the forfeiture and sale of their stock upon reasonable notice,
and the proceeds of such sale are used to pay the obligation
contracted by the subscriber. The subscriber is also liable to
the corporation for unpaid subscriptions, and failure to respond
to the "call" generally renders the subscriber liable to suit for
the recovery of the unpaid balance.
In corporations conducted for the benefit and profit of mem-
KINDS OF STOCK. 385
bers, the interest of each is represented by the number of shares
of stock which he holds. These shares of stock may be trans-
ferred or assigoed, and the person to whom they
stoclf °^ ^^^ ^^^^ transferred becomes entitled to all rights
belonging to the assignor. In case of death of a
shareholder his legal representatives succeed to the ownership of
the stock. The ordinary stock of a corporation is called common
stock to distinguish it from preferred or other kinds.
Each share of stock in a corporation has what is technically
termed a par value. This means the value indicated on the face
of the stock certificate itself, which usually ranges from $1 to
$100 per share. A great many mining corporations have stock at
a par value of $1, while manufacturing and mercantile corpora-
tions usually have stock at the par value of $100. Other cor-
porations have stock at the par value of $5, $10, $25 and $50 a
share. The entire issue of stock is universally of the same par
value. The par value of stock may differ from its
Ma'Tklt^vlhTJ* market value. The market value of stock is
usually ascertained from what the buying public
would pay for the stock in open market. Some stocks have a
market value much greater, even several times greater, than
their par value. This is usually caused by the large earnings
of the corporation making the stock a valuable investment, and
the demand of investors for stock regularly earning large divi-
dends causes the market value to appreciate. It, of course,
naturally follows that there are stocks in many corporations that
have no market value, and others whose market value is
less than the par value. It is not uncommon that stocks in
national banking corporations have a market value largely ex-
ceeding the par value, although the dividends are not necessarily
larger than stocks of other corporations of a lesser market value;
the usual careful management of national banks, coupled with
the watchfulness of government officers over their affairs and the
laws regulating them, insures to the public, in a very large
286 CORPORATIONS.
measure, the safety of the investment and the stability of the
corporation itself, which frequently appreciates the value of the
stock of such institutions to a higher market value than stock in
other corporations earning much larger dividends.
Preferred stock is that which entitles its owner to profits
or dividends in preference to other stockholders. "Guaranteed,"
"preferential/' "preference" and like expressions mean the same.
"Interest bearing" stock is a species of preferred
stock"*^ stock similar to a bond, since the company has
promised to pay interest in the nature of a fixed
dividend upon such stock, in preference to the common stock.
In case of preferred stock, its dividends are to be paid out of
the profits of the company first, and the common stock is then
entitled to what remains.
In the cases of certain trading and manufacturing concerns,
instead of issuing bonds for borrowed capital, they issue pre-
ferred stock, in one or more classes, such as first preferred, sec-
ond preferred and then common stock. Such stock usually has
"cumulative" dividends, which means that a dividend passed
at one period must be made up from future earnings before
the unpreferred shares receive any portion of the profits.
Such preference stocks are almost the same as bonds, the
difference being that they may or may not have preference of
claim against the assets of the company in case of failure, de-
pending upon the conditions under which they were issued,
and the dividends are not absolutely due and payable, like the
interest on a bond. In a year of depression or loss the dividend
on preferred stock can be passed, and will cumulate, but in the
case of bonds, if the interest is not paid foreclosure may result.
Therefore preferred stock is better for the company than bonds,
although the holder of the bond may feel more secure on ac-
count of the annual payments of interest being obligatory.
Since preferred stockholders have rights superior to common
stockholders, in reference to dividends, it is essential that the
PREFERRED STOCK. 287
creation of preferred stock should be strictly in accordance with
the statutes of the state in which the company is organized. If
Creation of ^^® stock is divided into the two classes before
Preferred bciug subscribcd, evciy one subscribing to either
class of stock assents to the conditions, but in
case a company issues only common stock and afterwards
finds itself short of capital to conduct the business, it may then
issue preferred stock, as a means of raising funds. This can
only be done, however, after a unanimous vote of all the holders
of the common stock, properly certified to the Secretary of State
and his permission received. The holders of the common stock
thus agree to surrender the first earnings of the company to the
preferred shareholders with the hope that by means of the
additional capital and good management, there may be a profit-
able remainder left for them.
Many corporations reserve in the hands of the treasurer a
quantity of stock to be sold or given away at some future time,
as occasion or policy may require, for the promotion of the
business. This is called treasury stock, and is the property of the
corporation. In case the stock is given away or sold at a dis-
count, however, should the company become in-
Treasury stock solvcut, thosc holding such stock would be liable
to the creditors of the company for the difference
between the amount paid for the stock and its par value, and
this notwithstanding the stock should bear the words "paid up
stock" or "fully paid and non-assessable." Thus it will be seen
that any person who accepts stock as a gift from a corporation
for his "influence" or on account of his "standing" in the busi-
ness community assumes a liability — not to the company if the
stock is marked "paid up stock," but to the creditors in case
the company fails.
Sometimes the stockholders of a corporation, after com-
plete organization and during its business life, donate by mutual
agreement a certain percentage of their stock to be held in the
288 CORPORATIONS.
treasury of the corporation and sold, and the proceeds used in
the corporate enterprise. This stock is also called "treasury
stock." This plan is often adopted by stockholders of an in-
solvent corporation or of one whose assets are impaired, and the
corporation is by that means made solvent. This plan is resorted
to in many instances instead of an increase of capital stock. An
increase of capital stock would not benefit the corporation unless
the stock were donated to it, and under the circumstances could
not be sold as readily as the treasury stock donated in the other
method.
Watering stock consists in increasing the amount of stock
issued beyond the value of the assets of the corporation. It
is an art in which the present generation seems to have become
expert, and by means of its clever manipulation great "oper-
ations" have been financed, to the enrichment of the manipulat-
ors. Suppose a gas company has a franchise to supply the city
and public with gas, and charges what is believed to be a fair
price therefor. After the company is well "a-going," by means
of good management or through the invention of improved
processes of manufacture it finds that it is making a very large
profit and will be able to declare an exorbitant
Watered Stock dividend. Knowing that if the public were aware
of its large profits there would be an immediate
clamor for a reduction in the price of gas, it sets about increas-
ing its capital stock to two or three times the original amount
and distributing it among the stockholders so that the rate of
dividend will be reduced to the normal income on capital.
Then again a corporation operating under a franchise for a town
or city, like a street railway, may have a stipulation in its fran-
chise that all net earnings over a certain percentage shall be
paid into the municipal treasury, as a compensation for the use
of the franchise. By watering its stock it manages to keep the
percentage of earnings below the limit and thus avoids payment
of the excess rightfully due to the municipality.
WATERED STOCK, 289
The stock of a corporation is sometimes watered by the
officers or a few large stockholders for their own benefit. They
represent that it is necessary to largely increase the capital stock
of the company in order to enlarge the plant, etc. After the
increase has been voted by the stockholders and authorized by
the Secretary of State, the few who are manipulating the deal
make a loan to the company and take the new stock in abundant
quantity as security. Of course there is a default in the payment
of the loan when due and the stock becomes the property of the
lenders. In the case of many corporations of a speculative char-
acter the stock consists largely of water from the first, the actual
assets bearing a small proportion to the capitalization of the
company. The officers and promoters sell the stock to outsiders
until they have secured sufficient money to conduct the enter-
prise, and retain the balance (usually a large portion) for them-
selves. This is termed "getting in on the ground floor." Of
Inducements coursc watering stock is an illegal proceeding,
to stock usually engaged in for the purpose of deceiving
Watering ^^^ public, and may be punished by the revocation
of the company's charter. But an increase of the capital stock
above the tangible assets to a. point which will include the value
of the franchise or "good will" is perfectly legitimate, for the
latter may be the most valuable asset of the company. Corpora-
tions are sometimes inclined to place a very large valuation upon
the "good will" or franchise, especially if they are earning large
dividends, owing to the prejudice in the public against larger
dividends than the usual rate of interest on loans. A firm may
earn 10 or 15 per cent, upon its capital and nothing is said or
thought of it, but if that firm should organize into a corporation
and earn the same profits, it would be severely condemned by
public opinion. Public sentiment is therefore a constant pres-
sure upon corporations to drive them to stock watering.
Money earned by a corporation over and above its expenses
remains the property of the company until the directors declare
290 CORPORATIONS.
a dividend, when it becomes the property of the individual stock-
holders. The company may then distribute the entire net earn-
ings as dividends or it may reserve part of the earnings of a
prosperous year to make up for possible lack of profits in future
years, or it may invest a portion of its net earnings in improve-
ments of the plant and distribute the remainder as dividends.
Again it may, by vote of the stockholders, declare
Dividends a stock dividend, that is, a dividend payable in
stock instead of cash. This is equivalent to an
increase of the capital stocl of the company and must be certi-
fied to the Secretary of State. A stock dividend is perfectly
legitimate and proper when the entire net earnings of the busi-
ness are needed to improve the plant, thereby increasing its value
to correspond with the increase of the capital stock,* When
stock is sold the dividend goes to the buyer, unless otherwise
agreed, and unless the dividend has been declared. If the divi-
dend has been declared it becomes in a sense separated from
the stock and is the personal property of the one who owned the
stock at the time it was declared.
Fictitious dividends are those which are supposed to be earned
by the company, but are really paid out of the capital or from
borrowed money. The object is to deceive stockholders into
believing that the company is prosperous when it is not, thereby
inducing them to purchase more stock or persuade
Dividends ^^^^^ friends to do so. When stockholders become
suspicious false statements are made as to the earn-
ings, expenses, value of the franchise, etc., and thus they
are quieted, while the manipulators of the company's affairs
♦The issuance of a stock dividend, although in many respects analogous
to stock watering, is not open to the same objection, since the issuance of
the additional stock does not involve a marking up of the book value of the
company's assets beyond their actual value. Some of the best managed
companies pursue the policy of paying very small cash dividends and capi-
talizing their surplus accumulations in this way from time to time, thus
keeping most of the earnings in the business while giving the stockholders
what amounts to a fair return on their investment.
DIVIDENDS. 291
perhaps are selling out or "unloading" their stock quietly, at a
good price, leaving the corporation wrecked. In rare instances,
however, fictitious dividends may be justifiable. Thus when
a succession of prosperous years is followed by one of disaster and
loss, after which the business promises good returns again, it
may be proper to continue the same dividends through the bad
year, rather than destroy the regularity of them to stockholders.
An illustration of this policy is the Chicago, Burlington &
Quincy Railroad Company. In 1888 the company suffered se-
verely on account of a strike among its locomotive engineers.
Though frankly admitting that no dividends were earned that
year, the company paid the usual dividend rather than disturb
the value of its stock and disappoint shareholders. Under the
circumstances this was justifiable.
Corporations are not permitted in law to declare and pay
dividends upon stock when their assets, at a fair valuation, are
not sufficient to pay their outstanding indebtedness to creditors in
full, and if directors and officers of a corporation knowingly
declare and pay dividends under such circumstances, they are
generally held individually liable for all of the existing debts
and obligations of the corporation and those subsequently con-
tracted. The payment of such dividends is considered a fraud
and has in instances been indulged in to procure to the stock-
holders assets of the corporation which should
Ditrtdends hsL^Q gone to the payment of corporate indebted-
ness. As long as the corporation is solvent and
has ample assets with which to discharge its existing indebted-
ness, there is usually no restraint upon paying dividends, though
unearned. This is a dangerous proceeding, at all events, and
the creditors, whose obligations have accrued subsequent to
the payment of such dividends, are, under some circumstances,
permitted to recover from the stockholders the dividends so paid,
when subsequent insolvency demonstrates that the capital was
impaired by such payment of dividends, and suspension of busi-
ness and failure followed.
292 CORPORATIONS.
The surplus fund, reserve fund, or sinking fund is the ac-
cumulation of a portion of the net profits of the corporation
set aside each year as a contingent fund to liquidate a debt, meet
reverses or enable the company to declare a uniform rate of
dividend whether the earnings are uniform or not. For the
purpose of marketing the stock and avoiding the fluctuations in
value which would be caused by a fluctuating divi-
Surpius dend, the surplus fund is created, and if the net
earnings should fall below the usual minimum
dividend limit, the surplus is then drawn on for the deficiency.
This enables the company to declare a uniform dividend, gives
better satisfaction to the stockholders, who know about what
dividends to expect, and makes the stock much more salable and
desirable to investors.
A sinking fund may be created to meet an outstanding obliga-
tion falling due at some future date. If it is a bond issue, the
deed of trust given as security for the bonds usually provides
that a certain sum shall be set apart out of the net profits and
paid to the trustee. The trustee then invests these sums in the
company's bonds of the issue to be retired, or any other issue of
the company, according to the provisions of the trust deed, and
these are held in trust until the final settlement, when the ma-
tured bonds are canceled and returned to the corporation. The
trust deed may provide that the trustee is to invest the sinking
fund in bonds of other companies or it may be left to his dis-
cretion.
CHAPTER XXX.
CORPORATIONS— Continued.
DIRECTORS; DUTIES OF OFFICERS; BY-LAWS; RECORDS.
The owners of the stock of a private corporation, as soon
as the charter is granted by the state and the corporation fully
organized, proceed to choose and elect a board of directors, and
the board of directors, after their election, proceed among them-
selves to elect the officers of the corporation. It is generally neces-
sary that at least a portion of the directors must
DiTecto^rs ^^ rcsidcuts of the state which granted the cor-
porate charter. The number of directors ranges
from three up to practically as many directors as is considered
necessary to conduct the business of the corporation.
It is usual in large corporations doing an extensive business
to elect directors in three classes, one-third to be
elected for one year, one-third for two years and one-third for
three years. The reason for this is to prevent a complete change
in the board of directors at any one election. Good business
prudence demands that a large proportion of the directors re-
main in office because of their familiarity with the details of the
business being conducted. If this method is adopted, at the
expiration of one year from the first election an election would
be held to elect directors to fill the places of those elected for
one year, thus retaining in office the two remaining classes
whose terms have not expired, and so on with the other classes
of directors as their terms of office expire.
The directors, immediately after their election, hold a meet-
ing called a "directors' meeting." At this meeting the directors
elect the officers of the corporation, which usually consist of
a president, secretary and treasurer. Other officers of the cor-
294 CORPORATIONS.
poration are frequently a number of vice presidents^ an assistant
secretary and an assistant treasurer. These are customary officers
of large corporations and not usual in small concerns.
It is generally the duty of the board of directors to formulate
and adopt by-laws which are made for the government of the
officers, directors and affairs of the corporation.
By-Laws These by-laws are required by law to be reason-
able and to be in conformity with the provisions
of the charter and the statutes of the state under which the
corporation is organized. The by-laws should prescribe the
number of directors, the offices to be filled by election, the
mode and manner of calling general and special stockholders'
meetings, general and special meetings of directors, general and
special elections of the directors and officers, and the duties of
the individual directors, officers and agents of the corporation,
and should provide for the term of office of the directors and of-
ficers to be elected.
The president of a corporation is usually considered the
legal head of the corporation, and when an act pertaining to
the business of the corporation is performed by
President him, it is Considered that he has binding authority
to act as the agent of the corporate body. The
president, however, is subject to the regulation of the board of
directors and also to the restrictions and regulations prescribed
in the by-laws.
The general duty of the secretary is that of custodian of the
books and records of the corporation and the corporate seal,
and to attach the corporate seal to written instruments when
required. The president and secretary are the
Secretary officcrs usually authorized by the board of direct-
ors to execute any instrument, note, bond, bill of
sale, etc., in the corporate name, and under the corporate seal,
that may be necessary to be executed by the corporation.
The usual duties of the treasurer are those of a fiscal agent,
BY-LAWS. 295
to keep the funds of the corporation in some safe depository,
to keep the officers and directors informed as to the financial
condition of the corporation and the amount of funds in its
treasury, and to prepare and keep the financial records of the
corporation. The treasurer is the officer usually empowered to
sign checks and to pay out the funds of the cor-
Trcasurer poration, but, like the president and secretary, he
is bound by the by-laws and should never pay
out money in any large amount unless specifically authorized
by the board of directors to do so, or unless the corporate business
is such and the by-laws so stipulate, that such payment should
be considered one of the regular duties of the treasurer.
The by-laws of a corporation should provide for frequent
stated meetings of the directors, who should assemble at the
general offices of the company under parliamentary rules of
order, and in such manner transact the business of the corpora-
tion. The president of the corporation, by virtue of his office,
presides as chairman of the meeting. Reports from the treas-
urer and secretary and of the general manager (in
Dh-ectora° corporations where there is such officer) are read,
and from the reports and recommendations of
those officers the business is taken up. It becomes the duty of
the secretary to keep full and complete "minutes" of what trans-
pires at the directors' meetings as well as at the stockholders'
meetings. These "minutes" should be transcribed fully into a
book kept for that purpose, known as a "minute book." The
business should be transacted by resolutions voted upon by the
president putting the question and calling for "Yeas" and
"Nays." The majority favoring or disapproving a resolution
generally decides the action of the directors upon the matter.
The duty of the secretary in keeping and in transcribing
these "minutes" is a very important one, as often very important
transactions are invalidated or made uncertain by carelessly or
mistakenly transcribed "minutes." Every reasonably important
296 CORPORATIONS.
act of a corporation should be first voted upon by tbe board of
directors and the resolution correctly transcribed into the *^min-
ute book" by the secretary. The "minutes" when
Secretary transcribed into the minute book should show
what directors and officers were present and
those that were absent, and should always show that a "quorum'*
was present. A quorum is the number of stockholders or
directors, usually a majority, prescribed by the laws of the
state and the by-laws of the corporation as being necessary for
the holding of a valid meeting for the transaction of corporate
business, and if a meeting is called and there is not a quorum
present, the meeting has no power to transact any business ex-
cept to adjourn to some particular time and place. A very im-
portant duty of the board of directors, which is frequently
neglected and omitted, is the auditing of current bills owing
by the corporation, and ordering the treasurer to make proper
payment. Great evils have grown out of the practice of allowing
a treasurer to audit and pay bills at his own discretion. The
best regulated corporations always strictly observe this rule.
When the minutes of the corporation are transcribed by
the secretary into the minute book they should be signed by the
president of the corporation and "attested" by the secretary.
These signatures are very strong marks of authenticity and
should never be omitted. Under no circumstances should min-
utes be transcribed upon loose sheets of paper
Minutes and kept unbound or pasted into the minute
book instead of having them written therein in
regular manner. It is usual at the next succeeding meeting of
the directors or stockholders to "approve" or order "corrections"
in the minutes of the preceding meeting as the case may re-
quire, and the subsequent approval of the minutes confirms
the prior resolutions and the acts of the various officers perform-
ing them.
The secretary of a corporation should keep a book, called
OFFICERS. 397
a "stock certificate book/' from which book stock certificates
should be issued and a record kept of the date, the number of
shares, and to whom issued, and where stock is
certfficates transferred from a stockholder to any person the
original certificate should be surrendered and the
secretary should issue a new certificate in lieu of the old one,
which should be canceled and attached to its former stub in
the certificate book and proper record kept of the transaction.
It is usual to include in the by-laws a provision for the
removal from office of directors or officers in the event that
the majority may deem it for the best interests of
offi^err'° ^^^ corporation. This provision is usually fol-
lowed by a further provision giving directors the
power of appointing a successor or of calling a special election,
to fill the vacancy caused by such removal.
The officers and directors of a corporation are required to
be particularly careful that no act is done by the corporation
which is in violation of the laws of the state or of
Illegal Acts the powcrs conferred by the charter. The direct-
ors and officers are personally liable for such illegal
acts, and it frequently subjects the corporation to the liability
of a forfeiture of its charter.
The directors of a corporation must act as a board and not
singly. Several directors cannot bind the corporation by their
several acts unless the acts are directly within the scope of their
authority. All contracts — conveyances of corporate property —
the creation of corporate liability — should be authorized by the
board of directors in meeting assembled. The authority should
be by resolution, which should be fully transcribed into the
minute book by the secretary. Directors who
Important ^^^^ ^^ ^^^^^ ^y^q corporation by their individual
acts, subsequently repudiated by the corporation,
are personally liable to the aggrieved party. It sometimes be-
comes necessary, on account of some emergency, that the officers
m CORPORATIONS.
of a corporation consisting usually of president, secretary and
treasurer, are called upon to perform an important act before
it is possible to convene a meeting of the board of directors.
Such acts are excusable under the circumstances, but should
immediately be ratified by the board of directors in regular
manner. If power to perform important acts is conferred by
the by-laws upon any of the officers of the cor-
signature poration, the board of directors at frequent inter-
vals should call a meeting and ratify, approve and
confirm the acts of the officers, letting the minutes show in
detail the acts and transactions confirmed.
Where the corporate signature is required to be signed to
written documents, it should be the name of the corporation
"by its president" and "attested" by its secretary and sealed with
the corporate seal. An example of a proper corporate signature
is as follows:
'The Chicago Coal Mining & Quarrying Co.,
By John Doe, President.
Attest: Eichard Eoe, Secretary.
[Imprint of corporate seal.]
The seal of a corporation is generally a device embossed
upon the document to be signed, being the name of the corpora-
tion, with the location of its principal place of business, as
"Chicago, 111." and the word "seal." The "attaching" or "affix-
ing" of the seal is the act of imprinting the device upon the
document to be executed.
Seals were in olden times used as signatures by individuals,
and originated from the ignorance of the masses of the common
people, who were unable to write their signatures. Upon the
advent of corporations, which, being unable to phy-
Seai sically do any act, or to write a signature, a "cor-
porate seal" was used as the supreme designation
of a corporate signature, the signatures and attestations of its
officers being considered of less consequence than the "affixing"
OFFICERS. 2d9
of the corporate seal. At the present time it is not always neces-
sary, but advisable, to attach or affix the corporate seal to all
documents executed in the name of the corporation. The "adop-
tion" of a corporate seal is one of the first acts of the directors of.
a corporation. The by-laws should prescribe the style of seal
and designate the officer, universally the secretary, to be the
custodian of it and affix it.
The existence of a corporation can be terminated at the will
of the stocknolders, who may, by voting so to do, surrender the
charter of the corporation to the Secretary of State to be can-
celled. Before this can be done, however, proof
Ex^tcnce°° ° must be furnished the Secretary of State that all
the corporate debts have been paid and the remain-
ing assets and property distributed to the shareholders. This
plan often becomes advisable when the corporate enterprise is no
longer considered profitable, and to further maintain the cor-
poration would mean an unprofitable expenditure of time and
money by the stockholders.
CHAPTER XXXI.
CORPORATIONS— Continued.
SUBSIDIARY CORPORATIONS; CONTROL AND MANIPULATIONS.
Subsidiary or auxiliary companies are those which are
formed or controlled by, or are dependent upon some large com-
pany. It frequently becomes necessary in order to promote the
success of a corporation to organize a subsidiary company as a
feeder or helper, for the purpose of carrying out a particular
part of the enterprise, such as supplying the corporation with
raw material, disposing of its finished product, called a "selling
company," constructing buildings or bridges, called a "construc-
tion company," etc. It may be that the parent company
has not sufficient means to properly carry out a subordinate pur-
pose or develop an enterprise which will be collat-
Confpa'i^es ^^^^ ^^^ ^^^J beneficial to the company. A new
and subordinate company may then be formed out
of the capital furnished by those stockholders of the parent com-
pany who may have money to invest, and the building or other
property of the subsidiary company may then be leased to the
parent company. Thus a railroad company, through a subsidiary
corporation, builds a hotel at a summer or winter resort where
one is needed, hoping thereby to increase its passenger travel, or
develops large sugar plantations along its line to add to its
freight traffic. An electric street car company needing a new
power house and not having the necessary funds with which to
build it, and not wishing to issue bonds or increase its capital
stock, forms a subsidiary company by which the power house
is built and leased to the controlling company. Nearly all of
our railway systems have branch lines, which at greater or less
300
SUBSIDIARY COMPANIES. 801
length reach from the main line into some agricultural section
or to mines or cities located away from the main line. In this
way transportation facilities are furnished to distant sections
and an outlet is afforded them for their products, while the
earnings of the main line are perceptibly increased by the busi-
ness brought to it. Sometimes these branch lines have been
expensive to build, where the attempt is to reach some min-
ing district, and the money for their construction was obtained
by issues of branch line bonds by the subsidiary company which
may have been guaranteed by the parent company or were made
valuable on account of a lease contract with the controlling com-
pany whereby the income of the branch road is assured, and the
interest on its bond issue and sinking fund is provided for.
Another reason for the formation of subsidiary or auxiliary
corporations is the manufacture and control of by-products.
Take, for instance, a corporation engaged in mining coal. It
frequently becomes necessary in developing the vein of coal to
remove a large quantity of fire-clay, also a red shale, which
products in themselves are valueless to the coal mining cor-
porations, but a subsidiary or auxiliary company is formed for
the purpose of manufacturing the fire-clay into fire-brick or
other marketable product, and another corporation
By-Products ^^ formcd for the purpose of preparing and vend-
ing the red shale, which is a cheap and excellent
material used in the construction of roads. These companies
are, of course, dependent upon the "parent" corporation for their
raw material and are usually related by contracts specifying the
price to be paid for this material, and requiring that the parent
corporation shall furnish such quantity of raw material as may be
agreed upon as being sufficient for the purposes of the subsidiary
corporation.
Perhaps the reason most frequently met with for the forma-
tion of subsidiary companies is where a corporation owning
patent rights or franchises parcels out the territory which it
302 CORPORATIONS.
controls to various subsidiary organizations, which may pay
yearly royalties or percentages, or may pay for the privileges
they get by giving a ^*lump sum" in cash, or by
TerritoT^°^ giving the parent company a part of their capital
stock, or by a combination of all of these "consid-
erations." In this way the stockholders of the parent company
avoid much of the risk, and also the necessity of raising a large
cash capital. This method has been pursued by the American
Bell Telephone Company and other well known companies with
signal success. Subsidiary companies, while being distinct cor-
porations, are dependent upon the controlling company, usually,
for their existence, and almost universally for their financing
and management to a considerable extent.
Auxiliary companies are sometimes the medium through
which profits that should belong to stockholders of the parent
company are diverted to the pockets of the directors and their
associates. In the history of railroad building in the United
States there are many instances where the man-
ManipuStions agcrs of a railroad company have organized a so-
called "construction company" to build an exten-
sion to its lines, and have then formed a separate corporation in
which the ownership of the extension was nominally vested,
and which proceeded to make a contract with the construction
company to build and equip its line, paying for it with its bonds,
issued for an amount in excess of the actual cost, and also with
its entire capital stock, which by some fiction of bookkeeping was
made to appear paid up in cash. The extension having been
built with the proceeds of the bonds, or perhaps a part of them
only, the next step was to sell or lease the new line to the old
company on terms that made the stock held by the construction
company a valuable asset. This and the remaining bonds, if any,
could then be divided in kind or sold and the proceeds dis-
tributed in cash. The morality of such a transaction as this is,
to say the least, questionable, though judgment should not be
CORPORATE CONTROL. 808
passed in any specific instance without full knowledge of all the
facts.
Of late corporations have been organized for a new functicn^
i. e. that of holding a controlling interest of the stock of other
corporations. The validity of these "parasite corporations/' as
they have been called, is yet to be passed upon by
Securities -j-jjg courts. If permitted to stand, they mav have
Companies r • • i? "
far reaching consequences by giving a few men
control of large interests, although owning comparatively little
capital. Let us consider the case of a stockholding corporation
with, say, $60,000,000 capital and this capital invested in, say,
51 per cent, of the stock of a railroad capitalized for $100,000,-
000. The holders of a bare majority of the stock of the stock-
holding or parasite corporation would then exercise control
over both corporations. Thus $30,000,100 of stock would be
able to control $100,000,000 of capital. But let us carry this
one step further and suppose a majority of the stock of the
parasite corporation held by another company of the same kind
with a capital of, say, $31,000,000. The owners of only a little
over $15,500,000 of its stock would then exercise effective con-
trol of the $60,000,000 company, and through it of the $100,-
000,000 company. This is an instance of a lesser corporation
controlling a greater. It is diametrically the opposite of the
subsidiary corporation. An example of a parasite corporation
is the Northern Securities Company, recently organized for the
purpose of merging the control of the Great Northern, Northern
Pacific and Chicago, Burlington & Quincy Railroads. This
attempt of merger has been declared illegal by the
Merger niegai courts ou the grouud of public policy, since such
a combination would remove competition, the
three roads being nearly parallel. The method of controlling
a greater corporation by means of a securities company holding
a majority of the stock, however, is a legal proceeding, in all
of those states where one corporation is permitted by statute
804 CORPORATIONS.
to own shares in another. It is merely an extreme exercise of
the principle of "majority rule."
Stockholding corporations designed to control greater cor-
porations hy means of the majority rule, as outlined above, savor
somewhat of the methods of the so-called "trusts/' which will
be considered in the next chapter.
CHAPTER XXXII.
CORPORATIONS— Continued.
COMBINATIONS; TRUSTS; PROMOTION; UNDERWRITING.
The word trust has been perverted during recent years from
its proper signification. Properly speaking, trusts are of many
kinds, but they all imply the placing of property or power, or
both, in the hands of agents who are called trustees, and whose
functions in relation thereto may be so broad as
" Trust°° °^ ^^ permit the widest possible scope in the manage-
ment of a business or the exercise of authority, or
they may be limited to the merely nominal holding of title
without any discretion or authority whatever, as in the case of
real estate held for the benefit of another. Trusts of this char-
acter are as old as human law and as varied as human experience.
An example of a pure trust may be found in what is known in
modern financiering as the "voting trust."
A voting trust is an arrangement whereby the stockholders
of a corporation part with their voting power for a specified
time or term, and thus for such time give up their control over
the affairs of the company. The object is to prevent changes of
management which might arise in case a majority
Voting Trusts of the stock should change hands, thereby per-
haps greatly diminishing its value by radical
changes of policy. If all or a majority of the stock is placed
in the hands of trustees, who give in return trust certificates
entitling the holders to their dividends the investment becomes
separated from the management. Holders of trust certificates
may transfer their holdings, but the management continues
unchanged. The Reading Railroad is an example of a corpora-
tion controlled and managed by a voting trust. This form of
305
306 CORPORATIONS.
trust is chiefly for the protection of bondholders, who are thus
assured of a uniform management of the corporation by com-
petent and experienced men, who will see that the interest upon
the bonds is promptly paid, and the sinking fund provided for.
The rapid growth and development of the manufacturing
interests of the United States during the last twenty years of the
nineteenth century put into vigorous operation the laws of trade,
one of which is that as industries grow in volume they tend to
centralize\ The large establishments can make and sell cheaper
than the small ones. They can buy the raw material cheaper,
avail themselves of the most approved machinery and employ
the best skill and business ability. Fierce competition is con-
stantly hammering down prices and the effect is to drive con-
cerns into combinations whereby they may increase their capital
and secure the benefits of a large volume of business. This
tendency was manifest some years ago in the formation of cor-
porations and changing of partnerships to corporations. The
same causes continued to operate and produce the combination
of corporations into trusts.
A trust may be defined as a combination of the capital of
several corporations under one management whereby the cost of
production is reduced, the amount of production limited and
regulated, and the cost of the article to the consumer is con-
trolled. Attempts were first made some years ago to secure the
benefits of co-operation between manufacturers by
Trusts agreements to sell through a common agent, and
at agreed prices, but the courts held such agree-
ments to be not binding, and members often secretly violated
them, so that it became necessary to make an absolute transfer
of the property of each member to the trust. A trust takes the
management and ownership of the property out of the hands
of the various corporations composing it, and deprives them of
the power to withdraw their assent.
The method of procedure in the formation of a trust is for
TRUSTS. 807
each of the parties to incorporate his establishment, if it is not
already incorporated. The stock of these various corporations
is then turned over to the managers of the trust, called trustees,
and in return for it the trustees issue trust cer-
How Formed tificatcs similar in some respects to shares in a
corporation. These certificates recite that the
holder is a beneficiary of the trust to the extent of so many
shares; and the certificates are assignable and transferable in the
same manner as certificates of stock, though their legal status is
in many respects dissimilar. It will be perceived that under this
exchange the trustees hold a majority of the stock in each of
the corporations and are able to elect the directors and officers
of each concern and thus control the management to the smallest
detail. They can close one factory, enlarge another, consolidate
others, regulate the output generally and control
Trust'^° * the price. Those concerns which refuse to join
the combination are crushed, if possible, by com-
petition. The certificate holders are not injured by the closing
up of this or that establishment belonging to the trust, since
their profits come from the whole organization and not from
any particular part. The holders of trust certificates elect trus-
tees annually, and with the performance of that function their
power ends. The trust certificates are watered to the point
where the rates of dividends will be very moderate, and then
sold upon the stock exchange like other stock.
This organization is called a trust because the stockholders
part with their voting power, and practically repose absolute
power in the trustees. The acts of the trustees and books of
account are usually not open to inspection by the certificate hold-
ers. No limit is placed on the amount of the trust certificates
that may be issued, and no question can be raised as to the exer-
cise of discretionary power by the trustees. There is practically
no limit placed upon the powers of the trustees in conducting the
business.
808 CORPORATIONS.
The greatest trusts formed in this manner were the Standard
Oil Trust, the Cotton Seed Oil Trust and the Sugar Trust, but
there seems no longer to be any doubt that a trus j
Trusts Illegal formed in this way is illegal. Eecent decisions of
our courts have so declared, on the ground of
public policy. Hence it is that a large number of the trusts are
now adopting a different mode of organization — that of the cor-
poration plan, as exemplified by the Diamond Match Company.
That company's plan was to organize one gigantic corporation
and have it buy up and own outright all of the competing manu-
factories, paying for them either in cash or shares of stock.
This form of organization, although called a trust.
Corporations ^^ ^^ reality a great corporation, and it is certainly
better to have the large corporation than the trust.
The unlimited power possessed by the trustees in the case of a
trust, their concealment of the condition of the business, and the
secrecy of their acts, is dangerous not only to the financial wel-
fare of the certificate holders but also to the public.
There is another class of corporations, which are formed by
the consolidation of several corporations into one. The method
of forming such a consolidated corporation is to have the stock-
holders of two or more existing corporations vote to consolidate.
This gives birth to a new corporation. The old corporations
are merged into the new, and although the new corporation may
take the name of one of the old corporations, it
ofCorporations nevertheless bears the same relation to all of them.
The new corporation issues capital stock to the
stockholders of the consolidated corporations, sometimes share
for share, sometimes upon an increased capitalization. The new
corporation is liable for all the debts and obligatiojis of each of
the consolidated corporations, and succeeds to all the property,
credits and effects which belonged to each at the time of the
consolidation. Notice must be given to the Secretary of State
of the action of the corporations in consolidating, and they must
TRUSTS. . 309
record the proceedings resulting in the consolidation, with the
Secretary of State, and usually in the county where the principal
office of the corporation is maintained.
Industrial corporations are those which are engaged in the
manufacture of the great utilities of life, such as steam engines,
harvesting machines, electrical apparatus, steel or oil. By com-
bining these into a virtual monopoly, the waste and expense
incident to competition, such as numerous traveling salesmen,
advertising and office expenses are saved and thus the net profits
are greatly increased. Owing to the ability of the combine to
earn net profits greater than the total profits of the different
concerns, under the competitive system, the combine may be
capitalized for a much larger amount than the total
indusu^fs capitalization of the individual concerns. Most of
the large companies in the United States are
financed in New York, owing to the superior facilities there for
such transactions on account of its greatness as a financial center.
Suppose there are a dozen companies engaged in the same line
of business with a total capital, say, of $30,000,000. After look-
ing the field over carefully, and acquainting themselves with
the present and prospective earnings of the various properties,
the promoters conclude to combine these into a single corpora-
tion with a capitalization of $100,000,000. A corporation is
organized with a hundred millions capital, thirty millions of
which is to be preferred,* and seventy millions common stock.
A suitable name, suggestive of the business and comprehensive
in scope, is chosen. Arrangements are made by the promoters
with several bankers in Wall Street to take portions of this
preferred stock and pay cash for it. A block of the common
stock goes along with each sale of preferred stock as a bonus,
together with the privilege of naming a member of the board of
directors of the new company. Each of the old concerns is now
♦Instead of preferred stock, bonds may be issued, and these would be
preferable in case the company expected to retire them.
310 • CORPORATIONS.
bought up by the new company, payment being made in common
or preferred stock, or cash, or a combination of all of these, as
the parties may have previously agreed.* The new company
takes over all assets and assumes all liabilities of the old com-
panies and provides a working capital out of the sale of the
preferred stock. This done, the combination is effected and the
operation of the several properties continues uninterrupted under
the management of the new board of directors and officers.
Having completed the combination as outlined above, the
promoters find still left in their hands a handsome block of the
common and perhaps some of the preferred stock as their com-
pensation for putting the deal through. After the combination
is made the Wall Street bankers first place their preferred stock
on the market, and as the business of the new company is
known to be prosperous, the stock sells readily. Next the
common stock is offered and disposed of, its sale being aided by
that of the preferred stock.
The business of promotion is a species of agency especially
devoted to the organization of companies and the floating of
stocks and bonds. The promoter is one who has a
Promotion financial acquaintance and knows where money for
various classes of investments may be secured. It
is almost necessary, however, in order to finance a large company
that a bank or trust company should be enlisted in the operation,
so that the sale of securities will be effected without any delay.
The bank or trust company acting in this capacity
Underwriting is kuown as an "underwriter," since it insures, or
underwrites, the sale or disposition of the se-
curities, taking itself such as it does not dispose of to other bank-
ers by a given time. In this capacity a prominent New York
*In estimating the values of the several plants, the common method is
to base the value upon the average earnings for a period of five years past,
as shown by the books. Thus suppose it is agreed that the property shall
be valued on a 10 per cent, basis, and the net earnings for five years aver-
age $30,000, the plant would be worth $300,000, due consideration being
given, of course, to the condition of the property.
MONOPOLIES. 311
banking house* has achieved a world-wide reputation, besides
reaping immense wealth from its operations. Sometimes the
promoters enter into contracts with one or more bankers to the
effect that the bank will buy a quantity of bonds upon the
property of the new company at a given price. These contracts
are then deposited with a trust company as collateral for a loan
sufficient to buy up the properties (the promoters having pre-
viously secured options on each property). After the properties
are bought, the ,bonds are issued and delivered and the loan is
repaid.
Instances are not uncommon where consolidations are compli-
cated by reason of the companies which it is desired to combine
owning public franchises which are not transferable. The most
usual way of getting around this difficulty is for
Under^LTascs ^^^ ^^^ Company to hold the stock of the old com-
panies, or a majority thereof, in its treasury, and
to operate under leases from the old companies. This is the plan
followed in the case of the street railway systems in the north
and west divisions of the city of Chicago, where the situation
is still further complicated by a majority of the stock of two
companies holding such leases, being in turn held by still an-
other corporation — the Union Traction Company.
The evil effects of trusts and monopolies can scarcely be
questioned, but it is far better to have the great corporation,
although it is in effect a trust, than to have a combination of
capital where its management is confined wholly to trustees
not accountable to stockholders. Publicity is both the prevent-
ive and cure for a great deal of rascality in the world. In case
of the great corporation, it pays its tax to the state, and is
subject to proper limitations. Creditors are able to judge of its
financial condition, and the public may determine whether it is
*J. Pierpont Morgan & Company. So successful has this firm been as
underwriters that other banljers readily accept bonds and stocl]:s offered by
them, and thus through them promotion becomes comparatively easy.
812 CORPORATIONS.
conducting business within the limits of its charter. But
whether the trust is a combination formed under the purely trust
method, or a gigantic corporation, its objects are the same: the
creation of a monopoly and the control of the market. For this
reason public sentiment is hostile to it. Judge Thomas M.
Cooley, a few years ago, speaking of trusts, said:
"A few things can be said of trusts without danger of mis-
take. They are things to be feared. They antagonize a leading
and most valuable principle of industrial life in their attempt not
to curb competition merely, but to put an end to it. The case of
the leading trust of the country has been such as to emphasize
the fear of them, and the benefits that have come from its
cheapening of an article of commerce are insignificant when
contrasted with the mischiefs that have followed the exhibitions
in many forms of the merciless power of concentrated capital/'
CHAPTER XXXIII.
CORPORATIONS— Continued.
RECEIVERSHIPS; REORGANIZATIONS.
The affairs of private corporations are frequently wound up
under the control of a receiver, who is appointed upon the
application of some interested party by a court, usually in the
county where the corporation has its principal place of business,
or where some of its property is situated. There are many
grounds for the appointment of a receiver. Chief among them
is the doing of some illegal act by the corporation or its agents,
which would subject the corporation to a forfeiture
Receiver of its charter, or when the corporation refuses or
fails to pay a judgment or decree for money, or
otherwise is unable to meet its obligations. A receiver is an
oflBcer of the court. He acts under the direction of the court
and must report all of his doings to the court. His chief duty is
J:he conservation of the company's property until it can be de-
termined whether the business is to be continued or must be
wound up, and if the latter, then to dispose of the assets and
distribute the net proceeds to the proper persons as the court
may direct.
The function of a receiver is often, therefore, a very im-
portant one. It frequently happens that the interest of all
concerned requires the business to be continued while proceed-
ings are pending, and in such cases the receiver is usually given
the necessary authority. An illustration of this
Recetve°/ would be in the case of the financial embarrass-
ment of a manufacturing concern having on hand
a large quantity of partly finished goods of little value in that
condition, but which by the expenditure of a small amount of
818
314 CORPORATIONS.
money could be finished and marketed at a fair price. The
receiver thereupon runs the factory under the supervision of the
court, long enough to complete the product then under con-
struction, which is sold by the receiver wlien completed, and
the creditors thereby receive a much larger percentage on their
claims than would be the case if the product were sold by the
receiver before its completion. The chief reason for the appoint-
ment of a receiver, however, is to enforce a ratable distribution
of the corporate assets among the creditors.
A corporation is said to be insolvent when its assets at a
fair valuation are insufficient, if sold, to discharge the existing
obligations to corporate creditors. It is possible
Insolvency that a Corporation may be solvent, yet its stock
practically worthless. Such would be the case of
a corporation having just enough assets when sold to pay cor-
porate creditors, leaving nothing for distribution to the stock-
holders in return for the sum invested by them in their stock. '
When a corporation becomes insolvent or unable to pay its
debts, or has exceeded its corporate powers, a court of equity
will, generally upon the application of a creditor or stockholder,
take charge of the affairs of the corporation and appoint a
receiver to either continue or close up the business, subject to the
court's direction. The directors of a corporation formerly had
no power to commence proceedings for a dissolu-
Receive^s ^^^^ ^^ ^^® Corporation and appointment of a re-
ceiver or for the distribution of its assets among
the stockholders, but the Supreme Court of the United States
in the Wabash Eailway cases laid down the doctrine that a com-
pany could itself ask for the protection of the court if such^
was for the best interests of all concerned. Under this doctrine
many corporations are placed in the hands of "friendly" receiv-
ers, by means of proceedings and without notice to other credit-
ors and the public, thus opening the door to great abuses of
corporate privileges and no doubt in many instances inflicting
RECEIVERSHIPS. 315
serious loss and injury on innocent stockholders. Directors
sometimes mismanage corporations in order to get them into
trouble and then by defaulting on the interest or other obliga-
tions of the company bring about a receivership and reorganiza-
tion in order to "freeze out" and get rid of the stockholders and
acquire the assets, after which the business is continued pros-
perously. Corporations sometimes procure the appointment of
friendly receivers and effect a reorganization in order to get
rid of certain bonds, guarantees, leases or other contracts which
have proven unprofitable. Such proceedings, however, cannot be
justified on grounds of business honor.
Only stockholders and creditors of an insolvent corporation
are concerned in the settlement and distribution of the estate.
The public generally has no interest in the matter. But in the
failure of large corporations upon which the public is accustomed
to depend for a particular service, like a railroad company, and
especially one having subsidiary companies, the public is interest-
ed and the matter brings up a multitude of complications. The
road must be kept running. It cannot be shut down, the property
sold, creditors paid and assets distributed among stockholders, as
in the case of an ordinary private business. Salaries and other
running expenses must be paid and the business tided along
until the entire property can be sold in bulk or a reorganization
of the corporation is effected. When entering upon his
duties the receiver will usually find many debts
Receiverships Unpaid and pressing repairs needed, with a con-
stant deficit in cash to meet current expenses.
The court will then authorize the issuance of receiver's cer-
tificates for the purpose of raising the necessary funds to carry on
the business. These certificates are a first lien upon the prop-
erty of the corporation, coming in before first mortgage bonds.
Sometimes the cash requirements of the receiver are met by an
assessment upon the stock and bonds of the company. The
stockholders and boldholders may as well submit to an assess-
316 CORPORATIONS.
ment as have receiver's certificates issued, which are a first
claim upon the assets.
Having the immediate necessities of the corporation pro-
vided for in cash, the receiver usually finds it necessary to have
the accounts of the company gone over carefully in order to
ascertain what the actual earnings of the husiness
Reorganization are. The prospccts of the future business of the
company are also taken into consideration, and
with these at hand a reorganization committee* or banking firm
is able to determine what the earning power of the company
after the reorganization will be, and hence what its capital may
be. If the capital must be reduced in order to bring it within
the earning limits, then the bondholders and stockholders must
suffer this loss in just proportions. Frequently the stockholders
are required to bear the entire shrinkage, upon the principal
that to them belong all the gains if the enterprise is successful,
and therefore they should be willing to stand the losses. The
stockholders, or bondholders, as the case may be, pay in their
assessments to aid in the continuation of the business and
usually are given additional stock (preferred) or bonds to cover
the amount of the assessment so that in case the company in
future years should become prosperous, they may bring forward
their claims for recognition and payment.
To adjust the respective interests, the reorganization com-
mittee may have recourse to the issuance of stock in several
classes, some of the shares being preferred as to the payment of
dividends, the remaining, or *^common," shares not
Reorganisation ^eiug entitled to participate until the preferred
stock has received a certain percentage, which may
or may not be cumulativcf Likewise there may be an issue of
bonds, called "income bonds," upon which interest will be paid
♦The reorganization committee consists of representatives of tlie cred-
itors, stocliliolders and bondliolders.
+ Cumulative dividends are such as. if not paid, are added to future
dividends, and thus accumulate until they are paid.
FORECLOSURE. 817
only in the event of its being earned. As in the case of dividends
on preferred stock, the interest on such bonds may or may not be
cumulative.
If a prop'^r proportion of the bondholders of a corporation,
usually one-half, are not satisfied with the reorganization as
outlined by the committee, or the amount or kind of new securi-
ties to be given them for their assessment under the proposed
plan, they may compel the trustees to begin foreclosure proceed-
ings, and when the property is sold, bid it in and take the property
in payment of their debt. The usual method in such an event
would be for the bondholders participating in this
Foreclosure movement to form a new corporation provided
with the necessary working capital so as to be
ready to make repairs and put the property in good condition,
and also to pay oif the non-participating bondholders who would
be entitled to their pro rata share of the price realized at the
sale. This would leave out the stockholders entirely. The
new company could then issue its own bonds free from all
obligations of the former corporation.
William W. Cook says: "The object of a reorganization is to
avoid foreclosure. The prospect of a foreclosure is the cause of a
reorganization. Frequently the reorganization is made after a
foreclosure has been commenced, the object of the foreclosure
being to cut off those persons who refuse to come into the reor-
ganization. Sometimes the reorganization practically does away
with the necessity of foreclosure, and this is the ideal condition
towards which the times are tending."
Frequently newly organized railroad companies and large
corporations issue bonds upon their property and franchises, os-
tensibly for the purpose of raising funds for extending and
improving their existing property. These bonds, not being paid,
at maturity, a foreclosure of the bond issue results. The prop-
erty is sold under foreclosure sale and a reorganization is had,
usually by a new class of investors, the property and franchises
318 CORPORATIONS.
transferred to the new organization, and the original stockholders
get nothing for their investment. This is a plan much favored
by unscrupulous manipulators and organizers who
Foreclosure ^^ ^^^^ manipulation acquire for themselves and
their associates the amount originally paid in by
the unsuspecting subscribing stockholders. Railroad and mining
corporations especially have been the means of filching the pub-
lic in general of enormous sums by this means.
BONDS.
CHAPTER XXXIV.
GOVERNMENT AND CORPORATE OBLIGATIONS.
KINDS; REFUNDING; NEGOTIATING; FORECLOSURE.
A bond is an obligation or promise to pay money, which
differs from a promissory note in that it is given under seal, the
effect of which addition is, under the common law, that if default
is made and payment has to be enforced by suit, the maker
cannot plead want of consideration.
When a government desires to borrow money the customary
method of obtaining it is to print and offer its bonds for sale.
These are issued in convenient denominations. In this country
the most common denominations are $500 and
Bonds""'"' $1,000, but sometimes, if the issue is what is called
a popular one, designed for sale among people of
small means, a portion of the issue is made in denominations of
$100, or even less in some instances.
In fixing the rate of interest which the bonds shall bear, the
government should, and usually does, take into consideration the
condition of the loan market (commonly designated as the money
market), and the state of its own credit, and makes the rate the
lowest one at which it can reasonably expect to sell the bonds at
par. If sold below par, the government will pay, and the in-
vestor will receive, more than the rate of interest named in the
bond. The reverse is true if more than par is realized for the
bonds. In general the nearer the selling price can be approxi-
mated to par the more favorable will it be for the maker, in the
long run. Although it is not possible for the government to tell
what price the bonds will bring until they are placed upon the
319
830 BONDS.
market and offered for sale, it is usually possible to gauge this
nearly enough for practical purposes. Still, to guard against
the contingency of unfavorable bids, it is usual to reserve the
right to reject any and all that may be submitted, and if all are
rejected, to make a new offering at a later date, with such changes
as seem likely to yield a better result.
The length of time the bonds are to run is also fixed by the
government, a-nd is a factor in the price they will bring in the
market. This is because investors prefer bonds having compara-
tively long terms to run, which relieve them from the necessity
of reinvesting at short intervals. Not infrequently bonds contain
a clause giving the maker the option to call them in and pay
them at any time after a specified date. This, while it enables the
maker to retire them and stop the interest, usually causes them
to sell at a lower price than if they ran for a fixed period, or, in
other words, the maker, in consideration of the option of pre-
payment, has to pay a higher rate of interest for that privilege.
As a rule, government bonds are not secured, but depend
wholly upon the credit and stability of the nation by which
they are issued. In the case of some of the weaker nations, as
for instance Spain and China, some issues have been secured by
a specific pledge of the revenue arising from certain customs
duties. This, however, is the exception and not the rule in the
case of government bonds. At different times the United States
government has issued bonds to relieve the needs of its treas-
ury. Those issued during the Civil War bore six per cent., but
the credit of the country is now so exceptionally high that it is
able to float its bonds at the very low rate of two per cent., and
its later issues have been at that rate.
Refunding consists in putting out a new issue of bonds to
replace an old one, which may either have matured
Refunding or which may be called for payment (the option
having been reserved) in order to gain the ad-
vantage of a lower rate of interest. Consolidated bonds or
STATE AND MUNICIPAL BONDS. 321
"consols" are those issued to refund several other issues, com-
bining all into one.
Coupon bonds are those which are made payable to bearer
and the interest on which is evidenced by detachable coupons.
Coupon and Thcsc coupons are torn off as they fall due, and
Registered are usuallj collectcd through some bank. Regis-
^°"**^ tered bonds are so called because the name of the
owner is registered upon the books of the treasury department
of the government issuing them. Sometimes the principal only
is registered and the interest is evidenced by coupons, as in the
case of bonds payable to bearer. This is the common practice
in the case of bonds issued by private corporations. With gov-
ernment bonds it is usual for the interest to be paid by
check mailed to the owner's address. The advantage of regis-
tration is that bonds of this kind, if lost or stolen, are of no
value to the finder or the thief, and hence are very secure.
In the United States the term government bonds, or "gov-
ernments," as they are called, is limited to bonds issued by
the general government. State bonds, or bonds issued
by the governments of the several states, are, however,
also government bonds, and differ in no essential respect
from those of the national government, except as to their
legal basis. They rest on the credit of a part of the people in-
state and stead of all the people taken together. This is
Municipal truc also of municipal bonds, as those are called
which are issued by counties, cities, towns, school
districts, sanitary districts, or other public corporations. They
are usually put forth for the purpose of raising funds for local
improvements, such as the erection of public buildings, the
building of bridges, or of water works, or of electric lighting
plants. In many of the states municipal governments cannot
issue bonds lawfully in excess of a certain percentage upon the
assessed valuation of taxable property in the municipality, and
not then unless authorized by a majority vote of the people.
323 BONDS.
A generation ago it was common, more especially in the
middle west, for municipalities to issue bonds to aid in the con-
struction of railroads. The burden of the debts thus contracted
bore heavily upon the people in many instances, and suits were
brought by the taxpayers to test their validity. As a result of a
decision of the Supreme Court of the United States that these
bonds must be paid, several of the States passed amendments
to their constitutions prohibiting towns or cities from voting
bond issues in aid of railroads.
"Voluntary contributions may be obtained from the citizens,
but municipal bonds — bonds that must be paid by the city or
county — can no longer be issued in those states," for aid to
railroads. — Cook.
Bonds issued by private corporations differ from those pre-
viously mentioned, chiefly in that they are as a rule secured by
mortgage on the property of the company issuing them. First
Bonds of mortgage bonds are those which are a first lien
Private agaiust the property pledged for their payment.
Corporations gecoud and third mortgage bonds arc similarly
secured by second and third liens. In case of foreclosure the
first mortgage bonds must first be satisfied from the sale of
the pledged property. Then if there is a surplus the second
mortgage bonds can be paid, in full or in part, as the case may
be, and so on.
Income bonds are a peculiar class of obligations. They are
usually secured by mortgage upon the property of the corpora-
tion, but they bear interest only in the event that the net earn-
ings of the company, after satisfying prior liens, are sufficient
to pay it. Unlike ordinary mortgage bonds, they
Income Bonds canuot be foreclosed for failure to pay interest
unless the net earnings applicable thereto should
be willfully diverted and applied to other purposes. Interest on
bonds of this class must, however, be paid out of the earnings
before any distribution of profits in the way of dividends can
be made to the stockholders of the company.
BOND ISSUES. 323
Mortgage bonds may be secured upon lands, buildings, manu-
facturing plants, telephone and telegraph systems, street car
lines, franchises, toll roads, bridges, railroad rights of way and
equipment — in short, upon tangible property of all
Bonds*^^""^ kinds. Sometimes the bonds are designated ac-
cording to the nature of the security, as for ex-
ample, termina/l bonds, which are bonds issued by railroad com-
panies upon the security of the valuable lands used for stations
and office buildings and for switch and storage yards, etc., in
the cities where their lines terminate.
Collateral trust bonds are bonds issued by a corporation and
secured by bonds or other securities owned by it and deposited
with a trust company, or, it may be, in the hands of individual
trustees, though the former is more usual. This form of bond
is sometimes resorted to by corporations owning bonds of other
corporations, which they do not wish to sell, or which they may
not be able to market without their guaranty. It is most fre-
quently used by corporations that make real estate mortgage
loans, which they pledge as security for their own bonds bear-
ing a lower rate of interest.
Debentures are unsecured bonds, and are a comparatively rare
form of obligation for private corporations, owing to the diffi-
culty of placing them on favorable terms.
Of many methods adopted to float a bond issue, the most
usual is to enlist the services of one or more of the banking
houses, trust companies, investment companies or firms making
a specialty of dealing in such securities. In the case of a
private corporation the officers are required to
Bo°nd ifsue make a full and explicit statement of its affairs,
its assets and liabilities, its earnings past, present
and prospective, the amount of the proposed bond issue, an
exact description of the property to be covered by the mort-
gage, and any other facts which may be relevant or which the
dealers may require. If the showing appears favorable the appli-
824 BONDS.
cant is informed that if upon thorough investigation the facts
prove to be as stated and everything is found satisfactory the
bonds will be negotiated. The bond dealers then detail their
own representatives or agents to make the investigation, which
is made in the most thorough and careful manner, and includes
a searching inquiry into the character and standing of the offi-
cers and directors of the company making the application, its
credit and business connections. Even when these are well
known it is usual to revise previous information and make sure
that it is in all respects up to date. The expense of the investiga-
tion falls upon the applicant, which may be required to make a
deposit in advance, of a sum estimated as sufficient to meet the
cost. Appraisers are employed to estimate the value of the
property, and expert accountants are set to work to examine the
company's books. In short, every available means is used to as-
certain its true condition. The dealers also employ special counsel
to report upon the legal status of the applicant, whether it is
conducting its business clearly within the limits of its charter,
whether it holds indefeasible title to its property, etc., and to
see that all the formalities required by law are complied with
when the bonds are issued. The result of all these investigations
being found satisfactory, the next step is the execution of the
mortgage, which is usually made in the form of a deed of trust to
some trust company. Then the bonds are issued and may be
offered for sale. Sometimes the dealers sell them on commission,
and sometimes they buy them outright. In the latter case, if
the issue is a large one, they may form a syndicate, or special
partnership arrangement by which several dealers contribute the
necessary capital and share in the profits of the transaction.
Individual purchasers of bonds run less risk in buying those that
are thus placed on the market by some house of established
reputation, because as the company or firm that finances the
issue usually invests its own or borrowed capital in the bonds
until they can be sold, they can rely upon all the precautions
FORECLOSURE. Z26
mentioned having been taken by the dealers for their own pro-
tection.
It is customary to include in the deed of trust securing a
bond issue a clause providing that if the interest is not paid
promptly as it matures, the entire amount of principal and inter-
est may, at the option of the bondholders, after default has
continued for a certain number of days, "become immediately
due and payable." To prevent one or two holders of small lots
of bonds exercising such option in derogation of the interest of
the holders of a majority of the issue, holders of some specified
proportion of the issue are usually required, under the provisions
of the trust deed, to unite in requesting the trustee to institute
foreclosure proceedings before such action is be-
Poreciosure gun. Forcclosurc having been decided upon, the
trust company files a bill in the proper court, al-
leging the default and praying that it be allowed to sell the
pledged property in satisfaction of the debt. In the majority of
cases the bondholders file a bill at the same time, asking that a
receiver be appointed to take charge of the affairs of the company
and conserve its assets for the benefit of all concerned. Not in-
frequently such action is taken by the stockholders before the
bondholders have had time to act. If there is opposition, the
court as a rule refers the case to a master in chancery, who, as
an officer of the court, takes testimony and makes a report to
the court, whereupon, if the report sustains the allegations in the
bill, a receiver is appointed.
The receiver is also an officer of the court and makes reports
thereto as often as may be required. Should the foreclosure
proceed to a sale and all of the property of the company be
swept away his functions thereupon cease. It often happens,
however, in the case of railroads or other large corporations,
that the bondholders do not wish to bid in the property at the
sale and assume the conduct of the business, nor do they wish
to run the risk that no other bid will be sufficient to pay the
826 BONDS.
debt. And it may also be the case that holdings of bonds and
stocks are such that the interests of the respective owners are
complicated. Furthermore it may appear possi-
Reorganization blc to couscrve the interest of all concerned, stock-
holders as well as bondholders, by postponing
the foreclosure sale, which lies within the discretion of the bond-
holders, and endeavoring to effect a reorganization of the com-
pany upon a basis which will enable it to continue its business
and give both the bondholders and the stockholders new and
marketable securities in place of those previously held.
Reorganizations are customarily effected through the medium
of committees composed of bankers or others skilled in finance,
who represent the various interests and endeavor to formulate a
plan which shall be acceptable to all. The first task of a reor-
ganization committee is to get authority from the bondholders and
stockholders to represent them, which is no small undertaking
in the case of a corporation the bonds and stocks of which are
widely scattered, in Europe it may be as well as in this country.
Although the procedure is called reorganization, the cus-
tomary method is to form a new company which bids in the
property of the old organization at the foreclosure sale; and then
issues its own bonds and stocks against the same and such new
capital as may have been provided. In this way the interest of
stockholders and bondholders who do not participate in the reor-
ganization is eliminated. Non-participating bondholders get only
such percentage of the proceeds of the sale as their bonds bear to
the total issue, and as there are very likely no other bidders aside
from the reorganized company it is usually enabled to make a
low bid. Non-participating stockholders of course get nothing.
Sometimes, however, when circumstances appear to justify it,
and their holdings are small, non-participants are permitted to
join the new organization after the sale on payment of a sum
exacted as a ''penalty."
Many reorganizations of American railroads are the conse-
REORGANIZATION. 827
quence of the vicious system of financing employed at the time
they were constructed. Too often the bond issue was made
large enough to pay the entire cost of construction and equip-
ment and also a handsome profit for the promoters, the stock
being either retained by the promoters or given as a bonus to
help the sale of the bonds which could not otherwise be mar-
keted. If the road could be made to earn the interest on the
excessive issue, well and good; if not, then disaster must follow,
sooner or later.
SECURITIES AND INVESTMENTS.
CHAPTER XXXV.
BONDS, STOCKS AND MORTGAGES.
GOVERNMENTS; STATE AND MUNICIPAL; KINDS OP MORTGAGE
SECURITIES.
By the term securities we usually mean stocks or bonds of
corporations, either public or private, and mortgages upon real
estate. These are evidences of property, and in the eyes of the
law are regarded as personal property. Being negotiable or as-
signable by mere delivery, and readily convertible, they are
extensively used as collateral security for loans and other con-
tracts, and have gradually taken the name of se-
Definition curitics. The value of any security depends upon
the character of the property which it represents,
and the rate of income which it is reasonably certain to produce.
The more secure the investment is regarded, the higher its
market price is apt to be, and therefore the lower the rate of
income which it yields. Investors who are willing to assume
risks are comparatively few, and those who wish to be certain
of the return of their capital are satisfied with smaller dividends.
United States government bonds may be classed as the high-
est order of securities before the public. Our faith in the in-
tegrity and stability of the government is such that we do not
hesitate to invest in its bonds at very low rates of interest.*
During the great Civil War our government issued
Governments large amouuts of bouds for war purposes, but the
amount has been gradually reduced, by payment
♦The lowest rate which any of the government bond issues draw is 2
per cent,
STATE OBLIGATIONS. 9SSQ
of the public debt, and the rate of interest lowered, while the
price has advanced until they are no longer a profitable class
of investments. The national banks now absorb a large portion
of our government bonds in compliance with the National Bank-
ing Law. The remainder of them are mostly taken as invest-
ments for trust and other funds where safety and facility of con-
version are greater considerations than a high rate of interest.
They are considered absolutely safe and always marketable.
State and municipal bonds are in some instances high class
securities, and in others of a very low grade. Unfortunately
many of the states have not preserved their credit in financial
markets. Swayed by popular impulse, they have, in times of
stress been led into the suicidal error of repudiating their just
obligations. A lack of patriotism and state pride combined with
a knowledge of the fact that a "state cannot be sued" has in
several instances resulted in dishonest legislation. Even where
bonds have been issued with an honest purpose, there have come
Unreliability political disturbances leading to a revulsion of
of state sentiment, or affording an opportunity to dema-
Obhgations gogues to assail public creditors and perhaps se-
cure a majority of votes against the payment of just debts.* For
these reasons, state securities are not usually regarded favorably
by investors.
"Whoever buys the paper of a state should do so with the
distinct understanding that he has nothing but its honor to
rely upon, unless the commercial relations of its citizens should
be of such a character as to make its financial credit important
to their business interests. There is for that reason little like-
lihood of such states as New York and Massachusetts ever repu-
diating their obligations." These states contain the two great-
est money centers of the country, and being the chief lenders,
they could not afford to set an example of repudiation to other
•Twelve states of the union have broken faith with their creditors at
different times, and either openly repudiated or ignored their outstanding
Obligations in whole or in part.
880 SECURITIES AND INVESTMENTS.
states. What has been said in regard to the uncertain value of
state securities applies to some extent to county, town and
municipal obligations. The same people compose the state and
the local organization, and the same moral sentiments exist con-
cerning both obligations. There is this important distinction,
however, that municipal obligations can be enforced in the courts,
provided they are properly created. There are
Securities many points which go to determine the value and
reliability of municipal securities. The first of
these is the legality of issue. If the bonds have been in litiga-
tion their legal status has probably been fixed by the courts,
but unless this is the case, their legality should be investigated by
a competent lawyer. Besides the legal points involved and the
disposition of the municipality to pay, there is also the question
of its ability to meet its obligations. The laws in many of the
states limit the power of municipalities to issue bonds to a
small percentage of the taxable property,* thus aiming to pro-
tect both creditors and taxpayers, but since the bonds must be
paid out of the taxes, and taxes are dependent upon the value
of property, it follows that the payment of a bond issue is con-
tingent upon the general prosperity of the town or business
community. As our cities and other municipalities grow in
wealth and population, they become better able to meet outstand-
ing obligations, especially where bond issues have not kept pace
with population, and hence the tendency of this class of securi-
ties is to gradually improve in the estimation of investors. One
disadvantage in the case of bonds issued by small municipalities
is that not being widely known the market for them is a limited
one. This makes them to some extent undesirable investments,
except for people who do not regard ready negotiability as im-
portant. With such investors they are favorite securities. The
bonds of some of the larger cities are only slightly less esteemed
than those issued by the general government.
♦In Illinois the limit is 5 per cent.
LOCAL SECURITIES. 381
Leaving now the consideration of the securities of public
corporations, we come to that larger class of mortgage securities
based upon private property, either corporate or individual.
Mortgage securities may be divided into two general classes,
one of which is based upon the actual value of the property
mortgaged and the other upon the earning power of the property.
Thus when a man loans money and takes as security a mortgage
upon the house and land of the borrower, he estimates the actual
value of the house and land. He does not wish to
slcuritfe*s become in effect a partner with the mortgagor by
making the repayment of the loan dependent
wholly upon the borrower's success in business. He wishes the
security to repay the loan in case the borrower fails to pay;
hence if he is prudent he loans but one-half or two-thirds of
the actual value of the security, so as to leave abundant margin
for shrinkage in case of forced sale. But suppose he loans to a
corporation — say a railroad company — by purchasing its bonds,
he depends for the security of his money not upon the property
as such, consisting of road-bed, depot buildings, etc., but upon
the business success of the road. If the road does a profitable
business the bonds are safe, otherwise not. There is not a rail-
road in the United States that would sell for its bonded in-
debtedness in case its business was to cease. The rails and ties
would be worthless except as old iron and wood, and the right
of way could be sold to neighboring farmers at only a small
price. Considered simply as real estate, the entire property
of a railroad company would be worth but a small fraction of its
bonded indebtedness. The value of the bonds, then, is sustained
by the profits or income from the property. From this another
reason is apparent why when a railway company becomes finan-
cially embarrassed the courts appoint a receiver to take charge
of and run the road, pending a settlement with the creditors.
To stop the operation of the road would be to vastly depreciate
if not ruin and destroy the property. The investor, therefore,
332 SECURITIES AND INVESTMENTS.
who contemplates the purchase of railway securities should con-
sider well the present and future earnings of the corporation.
If its earning capacity for any reason becomes seriously im-
paired, nothing can save the bondholders from loss. And yet
railroads are such a necessity to our civilized life, and their
traffic so dependent upon our industrial system that their income
can be made the basis for borrowing money as safely as can a
dwelling-house.
It is apparent from the foregoing that the desirability of
railroad bonds as an investment is dependent upon two con-
ditions, viz.: With old, established roads these two factors in
the problem can be easily ascertained, but with new roads the
question of earnings can only be surmised, and if the manage-
ment of the company is defective, or the earnings
Otocr Bonds ^^^ Overestimated the result is likely to be a re-
ceivership and reorganization, with all of their dis-
astrous consequences to investors. In the case of street railroads,
telephone systems, water and gas works, the franchise is usually
a valuable asset which will support a considerable bond issue,
especially when it has many years to run. On the other hand,
the danger of competition is always a menace to the income
of a corporation unless it has an absolute monopoly. Thus gas
and electric companies are competitors and the profits from each
may be correspondingly reduced.
The value of the security afforded by bonds of ordinary com-
mercial and manufacturing corporations must be estimated
wholly upon the merits of each individual case. Each interest
must be investigated in all its bearings in order to reach a
wise decision, while competition, management and public re-
quirements are important factors which should be carefully
considered by the investor before placing his money.
There are many uncertainties that threaten stocks which do
not appertain to bonds. The latter are secured upon the prop-
erty or earnings of the corporation, and are fixed and determined,
STOCKS. 333
but the value of stocks rests largely upon the earning power and
the management of the corporation and also the future condi-
tions under which the company may conduct its
stocks business. The investor in stocks should, there-
fore, anticipate the future and weigh the proba-
bilities of business success. A business which is successful
to-day may be run at a loss next year or compelled to close down
entirely. Competition is constantly shifting and must be met
in a variety of forms. New inventions and labor saving processes
may give a temporary advantage to those who discover or secure
them first, and reduce the dividends of companies which were
prosperous before. The telephone competes with the telegraph,
and the trolley car cuts into the suburban traffic of steam rail-
roads. Lines of business which yield large returns especially in-
vite competition, and as a result the business may become over-
done and profits entirely disappear. The stock of companies
formed to use or promote new and useful inventions is frequently
the most profitable and where a monopoly is thus secured for a
time, large fortunes have been made. Late investors in such
stock, however, are very likely not to fare so well. Every hour
shortens the life of a trade monopoly. Among the safest stocks
are those of well managed banks and insurance companies. The
states exercise a supervision over these companies, and their
shares can generally be relied upon as representing actual cash
investments, especially in those states where the laws are strict
concerning such corporations and the general administration of
law is considered good. In the case of banks, however, the
stockholder often incurs the risk of liability to creditors to the
extent of the face value of his stock, in the event of the bank
becoming insolvent.
Mortgages on real estate are considered a desirable class of
securities, especially when the mortgage represents not more than
one-half the actual market value of the property, and where the
property is located in a prosperous and growing community.
334 SECURITIES AND INVESTMENTS.
Many insurance companies and savings banks decline to loan
upon wooden houses, confining their investments to securities
upon either stone or brick improvements for the
Mort^g^^s*' reason that these are less liable to deteriorate by
the ravages of time or to be destroyed by fire.
Other investors prefer mortgages upon residence property upon
the theory that a man will protect his home from foreclosure
when he would not other property. Unless there is a decided
advance in the value of land in the vicinity of the property
mortgaged, the mortgagor should aim to reduce the amount
of the mortgage at maturity by making a part payment at least,
since property naturally deteriorates with time, and at the end
of three or five years the property may not be as good security
for the debt as it was originally.
Eeal estate mortgage notes are usually made payable to the
order of the maker and are then endorsed by him in blank.
This makes the security transferable by mere delivery, and hence
the holder of a mortgage may sell it, and an investor purchase it,
the same as any other chattel. The buyer must of course, exer-
cise good judgment and proper care to see that the security is
sufficient and the character of the property satisfactory before
investing. By trusting to representations of brokers in regard
to these vital points, instead of making a personal investigation,
investors have been known to find later on that their money
was paid for a comparatively worthless security.
As the country becomes more densely populated, and the un-
occupied lands of the West are taken up, the farm lands in the
great Mississippi Yalley become more valuable and prices tend
to advance. Mortgages upon good, productive farms in the
central west are therefore growing in popularity
Mortgages ^^^ morc and more absorbing the capital of in-
vestors. Paper resting upon landed security in
the newer and rapidly developing sections of the West, where
farming is uniformly successful is almost sure to be good. But
MORTGAGES. 886
like city mortgages farm securities must be carefully investigated
or disaster may result. There have been mortgage companies
located in western cities whose business consisted in making
loans on farms and selling the securities to eastern investors. In
some instances these companies guaranteed the paper. But
as the loan company used the same money over and over again
to make the loans, it is apparent that their guaranties would
soon exceed the amount of their capital and hence become prac-
tically worthless. One objection to farm loans is the uncertainty
of payment of interest in case of a crop failure. What an in-
vestor wants is not only safety of principal, but regularity as to
payment of interest. A locality where there is a diversity of
crops is preferable for desirable mortgages, since in case there
should be a failure of one crop, the mortgagor may yet be able
to pay his interest from other products. Where a single crop is
depended upon, or the land is situated so that it is subject to
overflow, resulting in an occasional total failure of crop, the
mortgagor may be compelled to default in the interest perhaps
for a year.
Then again, investors would do well always to consider the
disposition and ability of debtors to pay. No matter how good
the security, the mortgagor's credit has an important bearing
upon the value of his paper as security for money
to p'aT*'°" loaned or invested. Where public officials repudi-
ate their just obligations and the laws are framed
in the interest of the debtor class, investors may well beware.
As previously noticed, several of our states have openly violated
their obligations, and hostile laws have been passed against
capital by both state and municipal governments. It can hardly
be expected that private citizens will prove to be shining ex-
amples of integrity when those in authority above them are
thus derelict. Investors, therefore, aim to avoid such localities.
COMMERCIAL CREDITS.
CHAPTER XXXVI.
OUR CREDIT SYSTEM.
ASSETS; LOSSES; LIMIT OF CREDIT; MACHINERY OP CREDIT.
The wonderful commercial progress and development of this
country during the past century has astonished the old world and
amazed even ourselves. In looking about for the moving causes
which have produced this great result, we must ascribe a large
part to our credit system, extending as it does, to every nook and
comer of the land. In no country in the world is credit so easily
obtained and so extensively used as in the United States. Capital
goes out freely and willingly and takes its chances in all manner
of enterprises, so long as they offer fair prospects of returns on
the investment. Thus the American people are educated in the
use of credit, and have learned to depend upon it, until it has
become closely interwoven with our commercial
System * systcm. In European countries credit is more or
less restricted. In Italy and Spain little credit is
extended, and accordingly we see a languishing commerce. In
Western Europe it is more widely used and commerce shows
corresponding vigor and activity. The use of credit is not alone
confined to the purchase or sale of goods on time or borrowing
or lending money, but extends to innumerable acts of trust and
confidence by which the machinery of the business world is
kept in successful operation. A borrows money at his bank
and the amount is placed to his credit. He owes B and gives a
check in payment. The check is deposited in B's bank and
passes through the clearing house, where it is offset by some
other check of like amount, and as a result the credit is trans-
336
CREDITS. 337
ferred from the account of A to that of B. No money or actual
cash is handled in the transaction, but merely a transfer of
credit. It is one incident in our credit system. Our clearing
houses, stock exchanges and produce markets are all conducted
on the same principle — one debt being set off against another,
and a small percentage of the transaction actually liquidated in
cash. All of our large corporations and their gigantic oper-
ations of both a public and private character are possible only
through the medium of our credit system. Our whole com-
mercial fabric rests upon it.
Since our credit system forms such an important factor in
the problem of business management, it becomes necessary to
understand and carefully use it. Losses are imperative under a
credit system, and the aim must be to more than recoup for the
loss by an increased volume of business. Losses in business
are largely the result of carelessness, inexperience and a lack
of proper system and discipline on the part of business men, or
a lack of knowledge and judgment in giving credit.
iii°evftebie ^^ experienced credit man is responsible for the
assertion that "we have only to take the average
business house for the last twenty years and figure up the
losses sustained by it and compare the sum total, plus com-
pound interest, with its present financial status, and we shall
find that it has lost more than the capital accumulated during
the period."
A lack of a prompt and effective credit department where col-
lections are looked after carefully and thoroughly, is sure to re-
sult in a stream of losses to the house, with possible failure in
the end. So extensive has the use of credit become that large
commercial houses have legal departments in connection with
their credit departments kept busy with the collection of ac-
counts of delinquent customers. Often the most energetic action
is necessary to obtain assets in advance of the sheriff or assignee.
From Dun's Eeview, New York, we have the following:
\ COMMERCIAL CREDITS.
TABLE OF FAILURES IN THE UNITED STATES,
1891 TO 1901.
Year.
1892...
Number of
Concerns
in Business.
1,172,705
Number
of
Failures.
10,344
Amount
of
Liabilities.
114,044,167
Average
Liabili-
ties.
11,025
Proportion
of
Failures.
1 in 113
1893...
1,193,113
15,242
346,779,889
22,751
1 in 78
1894...
1,114,174
13,885
172,992,856
12,458
1 in 80
1895...
1,209,282
13,197
173,196,060
13,124
1 in 92
1896...
1,151,579
15,088
226,096,834
14,992
1 in 76
1897...
1,058,521
13,351
154,332,071
11,559
1 in 79
1898...
1,105,830
12,186
130,662,899
10,722
1 in 90
1899...
1,147,595
9,337
90,879,889
9,733
1 in 123
1900...
1,174,300
10,774
138,495,673
12,854
1 in 108
1901...
1,219,242
1 1,154,634
11,002
12,440
113,092,376
166,057,271
10,279
12,949
1 in 111
Average
1 in 95
The period of time covered by this table includes the year of
panic, 1893, and the depression which followed, as well as the
years of prosperity at the latter part of the table, and may thus
be taken as fairly representative of the average working of our
credit system. Out of 1,154,634 mercantile and manufacturing
firms, corporations and individuals doing business during the
period, as shown by the table, 12,440 failed, or one in every
ninety-five. Innumerable petty failures consisting of those
whose capital is too small for a rating, are not included in these
figures. The average total liabilities of the concerns failing are,
in round numbers, $166,000,000. This is not a total loss, as a
portion will eventually be paid. We may safely assume that
not more than thirty per cent, will be paid, leaving a net loss
to creditors of about $116,000,000 in each year. This makes
no account of the injury to trade consequent upon
AsMte^^^°^ having such a large amount of assets tied up in
litigation or pending settlement. Since thirty per
cent, of the liabilities are realized in cash, after the expenses
of conversion of the assets, shrinkage, etc., it follows that the
LOSSES. 339
assets of the firms whose failures amount to $166,000,000,
as above stated, probably amounted to one-half or two-thirds the
liabilities, or, say, eighty to one hundred millions. The per-
centage of loss can only be ascertained by knowing the amount
of business done. Business houses usually compute the rate of
loss upon the volume of business transacted and not upon the
amount of their capital, and since the capital of a concern is
usually turned over several times in a year, the volume of busi-
ness may be four or five times the capital invested. Without
knowing the volume of business done, or the capital invested in
mercantile and manufacturing enterprises, it is, therefore, im-
possible to arrive at the percentage of losses under our credit
system, but it is apparent that, beneficial as the system is, we
are doing a large amount of business not only for no profit, but
at a loss of capital. It is true that within certain limits the
merchant adds his percentage of losses to his selling prices,
and thus the customer who pays makes good the loss occasioned
by those who do not pay, but competition is constantly tending
to keep prices uniform, and the merchant who makes the least
of bad debts comes the nearest to a successful career, provided
the volume of his business is not restricted by too much caution.
To what extent credit may be extended to a buyer in any
given case is a problem depending upon a combination of
factors. Outside of the capital invested, assets and liabilities,
is the character of the individual, the conditions surrounding
his enterprise which make it a success or failure, his experience,
etc., all of which must be carefully weighed by the credit man
before arriving at a decision. Mr. P. R. Earling, in his book
entitled "Whom to Trust," says: "On the supposition, justified
by experience, that the assets of a mercantile firm,
Limit of Credit in the cvcnt of forcclosure or assignee's sale, do
not bring over 65 per cent., the limit of credit, to
insure us dollar for dollar, must be fixed at 65 per cent, of the
inventory of the assets. In the case we have assumed, $10,000
840 COMMERCIAL CREDITS.
assets would pay liabilities of $6,500, and this amount must be
established as the limit, and in all eases this relative proportion
should be maintained/'
The nature of the assets should be considered, however, as
this may vary the amount of shrinkage greatly. If the assets
consist largely of staple merchandise and secured notes or ac-
counts, the shrinkage may be comparatively small, especially if
the market for such goods or products is an advancing one.
On the other hand, old goods and stale accounts are subject to a
fearful shrinkage when an attempt is made to convert them into
cash.
Written and signed statements of assets and liabilities are
now exacted of customers applying for any considerable amount
of credit, by wholesale houses and banks, thus placing the
facts in such form that in cases of misrepresentation the person
signing the statement may be punished for fraud in "obtaining
goods by false pretenses." Buyers may intend to be honest in
their statements, but are frequently optimistic and inclined to
overestimate their resources and ability to pay. The written
statement tends to reduce the problem of "facts and figures,"
and dispel illusions. It is also customary to re-
statements quest references in order to ascertain how a firm
stands in the estimation of others, but these are
of much or little value, according to the motive of the writers.
A jealous desire to injure a rival may cause an unfavorable
report, or a disinclination to injure a friend may be the motive
for a half favorable reply concerning an undesirable customer.
Banks are constantly asked concerning the financial standing of
their customers, but it should be remembered that a man often
keeps faith with his banker when he stands poorly elsewhere,
and thus the banker's opinion may not be accurate.
Commercial agencies greatly facilitate credits by furnishing
information concerning the financial status of business firms
and individuals. This information is collected in a variety of
LIMIT OF CREDIT. 341
ways, by special reporters, lawyers and others, and supplied
confidentially to subscribers. In this era of extensive and varied
uses of the credit system, a systematic method of collecting
information concerning firms and furnishing it to those who are
properly entitled to receive it, is of immense advantage. In
addition to quarterly and semi-annually revised reference books
the mercantile agencies undertake to furnish their
Age^i'es^' subscribers with special reports, consisting of de-
tailed statements of facts concerning the financial
status of every dealer of any consequence in the country. The
mercantile agency also takes cognizance of mortgages, judg-
ments and transfers of property upon the county records, and
preserves the facts concerning them upon the agency's records.
They endeavor to get "Signed Statements" of assets and liabili-
ties from the debtor class whenever possible, and thus a mer-
cantile report, made up from a variety of sources, is of great
advantage to every dispenser of credit, especially as the courts
have held that under certain circumstances a statement fur-
nished a mercantile agency is as binding on the maker as if
furnished a creditor direct. The reliability of these reports
cannot always be depended upon strictly, but the prosperity
of the companies engaged in that field of research is an evidence
that the public has confidence in them.
The facts gathered by the mercantile agencies* are not pub-
lic property, but are furnished under restrictions to sub-
scribers to the agency only. It has been decided by the courts
that the agencies are not responsible for inaccuracies of their
statements, nor can they be prosecuted for libel on account of
furnishing facts which may prove damaging to the business
standing of a dealer. These institutions aim to verify all im-
portant facts before sending them out, and since no malice can
be shown, in case of error, there is little room for litigation. The
♦The principal mercantile agencies are R. G. Dun & Co. and Bradstreet's,
although there are a number o£ lesser importance.
342 COMMERCIAL CREDITS.
commercial agency is ever on the alert for every item of informa-
tion which would seriously affect in an injurious way, the credit
or financial standing of a dealer. The recording of
Reports'^^° a chattel mortgage, confession of a judgment,
sale or other transfer of property, are noted,
and in the case of an absconding debtor his whereabouts
is frequently disclosed by the reporter or correspondent of the
mercantile agency.
In addition to the mercantile agencies we have credit asso-
ciations in many of the different lines of trade, in which a large
number of the firms and dealers are banded together for mutual
protection. A bureau is created and the information required
by members obtained by a clerk employed by the bureau. The
main object of these associations is mutual aid in the matter of
credits. Buyers who fail to meet their bills are
Associations prevented from obtaining credit from other houses,
by having their past record brought to the atten-
tion of all members of the association, and thus by a variety of
means, business firms aim to guard the expansion of credit, and
permit its proper and conservative use.
The laws with reference to the collection of debts in dif-
ferent localities must also be considered when extending credit.
In some states the laws are framed in a manner decidedly favor-
able to the debtor class. The exemptions are large enough to
shield several thousand dollars worth of property, and the "laws
delays" are more than necessarily numerous. Es-
Laws ^°" pecially in the western frontier states where it is
perhaps intended to attract settlers by favorable
laws, thus giving the pioneer an advantage to offset the hard-
ships which he must undergo, in opening up a new region, do
we find the laws most favorable to the debtor. In the eastern
and more populous states the laws are more equitable and judg-
ment and execution can be more quickly obtained. Every suc-
cessful credit man must be conversant to a limited extent, at
least, with the laws of the states in which he does business.
CREDIT ASSOCIATIONS. 348
In extending credit to a co-partnership some factors enter
into the problem which do not appear in the case of a single
individual. In order that a partnership ma}' be successful in
business it is essential that the different members of the firm
should be harmonious in their ideas and actions. Discord is
sure to lead to trouble and probable failure, or
Partnership dissolutiou. "A housc divided against itself can-
not stand." The credit of an inharmonious co-
partnership must necessarily be rated low, and the credit man
must decide whether the partnership is one which combines the
elements of success, and whether the firm is stronger or weaker
than its individual members. It is an old adage in business life
that one would do well to "avoid unfortunate men in your busi-
ness affairs." If a firm is composed of several partners one of
whom has hitherto been unsuccessful it diminishes the credit of
the firm. We may sympathize with "an unfortunate man" but
hesitate to credit him.
Corporations have their advantages and their disadvantages.
One of the latter is met with in obtaining credit. For old and
well known houses whose credit is established, to incorporate
in order to facilitate management of the business or the transfer
of interests therein, is perfectly proper and wise, but in the case
of new enterprises, the corporation labors under
Corporations a decided disadvantage. The partners of a firm are
severally liable for all debts of the firm to the
fullest extent. They are bound during a lifetime, or until re-
leased by the statute of limitations, to pay the firm debts, but
with a corporation, each shareholder is liable only to the amount
of his stock.* Failure of the company cannot involve him beyond
this. It is this feature, the non-liability of the individual mem-
♦Each shareholder is liable only to the amount of the par value of his
stock, in most of the states, and cannot be proceeded against for corporate
liabilities except in case the shares have not been fully paid, In which
event the unpaid portion is collectible at law. In Ohio and a few other
states sharehoideii are liable to twice the par value of their stock.
344 COMMERCIAL CREDITS.
bers of the company, which makes the credit rating of a cor-
poration lower than a partnership under the same conditions.
There is no individual character in a corporation upon which
credit may be based. It has no moral status. It is a "soulless"
creature of the law, limited and bound by legal enactments.
As a consequence it is entitled to a lower credit rating than
a partnership. Banks and credit men frequently require the
personal signature of a responsible officer of the company as a
guaranty of its obligations.
PURCHASE AND SALE OF REAL
ESTATE.
CHAPTER XXXVII.
LANDED PROPERTY.
TITLES; VALUES; NINETY-NINE YEAR LEASES; MORTGAGES.
Private ownership in land is a recognized right among all
civilized governments and people. Titles are derived originally
from the government,* which continues to be the paramount
owner of the land under the doctrine of eminent domain, and
which holds title to all unclaimed and undeveloped lands. The
title to the lands in the United States was acquired from Great
Britain by the treaty of peace, from France, Spain and other
countries by either purchase or conquest. The title of the
European nations to this immense territorial domain, which
passed to the United States was founded upon their discovery
and conquest. By the customary European law of nations
discovery gave title to the soil subject to the right of occupancy
by the natives. The United States, therefore, de-
Tities rived its title to all the lands within our borders,
subject to the right of occupancy or use by the
Indians. The millions of square miles of our vast undeveloped
plains and forests were called government lands and this land
the Government has parceled out and sold at the minimum price
of $1.25 per acre, or donated to individuals or corporations for
various considerations.t The ^'chain of title" then begins with
♦In a monarchical government they are derived from the king,
tUnder the homestead law of 1862 a settler was permitted to acquire
title to 160 acres of Government land gratis under certain restrictions by-
cultivating it five years.
845
346 PURCHASE AND SALE OF REAL ESTATE.
the Government and runs down through the various holders
who have taken it either through purchase or descent, to the
present holder in fee simple, or claimant of the land.
The ownership of real property "in fee simple" excludes all
qualifications and restrictions as to the persons who may inherit
it as heirs, thus distinguishing it from a "fee tail." It is the
largest possible estate a man can have, being absolute in per-
petuity. It is where lands are given to a man and to his heirs
absolutely without any restrictions or limitations put upon the
estate. The word "simple" in the compound word "fee-simple"
adds no meaning to the word "fee" standing by itself. The
"fee tail" is an inheritable estate which can descend to certain
classes of heirs only. It is necessary that they should be "heirs
of the body" or "blood heirs." The theory of a "fee tail" estate
was derived from the old Eoman system restricting estates.
Having extinguished the Indian title by treaty or otherwise,
the next step was to survey the land into ranges, townships and
sections by means of lines running north and south, and east and
west, but not including navigable streams or any land especially
reserved, such as Indian Eeservations and National Parks.
Townships are six miles square and contain thirty-
Surveys six sections of six hundred and forty acres, each
section being one mile square. These sections
are divided into halves, quarters and eighths. The ranges,
townships and sections are numbered in regular order, and hence
by knowing the number of each we have a brief and accurate
description of the tract. Salt springs and lead mines were
specifically reserved to the United States, in all government
land, our fathers probably supposing these constituted the only
mineral wealth worth reserving. One section in every town-
ship, numbered sixteen, was reserved for the purposes of edu-
cation.
When a town or village is laid out, all the land included
within its limits is platted, upon a map, accurately drawn, which
LAND VALUES. 347
is kept in the offices of the town or city. Anyone who owns
land within the limits of the town or city may sub-divide it into
lots by having it surveyed by a competent surveyor, which survey
must be acknowledged by himself and the surveyor before a
notary, and a true plat with such acknowledgment filed with the
County Recorder. One who subdivides land usually names the
subdivision after himself and thereafter in describ-
subdivisions ing any lot or parcel of the land the description
must include, in addition to the number of the
township, section, and part of section, the name of the subdi-
vision, number of block and lot. A subdivision may be subdi-
vided again and this is a re-subdivision, or a lot may be divided
into two or more lots and these are called sub-lots. A legal
description of a sub-lot may then read somewhat as follows: Sub-
lot three of lot thirty in Brown's resubdivision of the south
twenty acres of the East one-half of the West one-half of the
Southwest quarter, section eight, township thirty-nine, range
fourteen East of the Third Principal Meridian, Cook County,
Illinois.
Land values depend upon innumerable conditions, and as the
conditions change the values are liable to change also. Farming
land is chiefly valuable on account of its fertility and other favor-
able conditions for raising produce, its nearness to market, trans-
portation facilities, etc. City lots are dependent for their value
chiefly upon location, those in the center of trade
Values being the most valuable. As cities grow older and
increase in business and population, the pressure
for desirable lots in good locations grows heavier and prices ad-
vance. Improvements upon land, however, are constantly dete-
riorating from age and use and this acts as an offset in a degree
against the advance in the land values. In large cities, for
instance New York and Chicago, substantial improvements are
frequently destroyed and modern ones of greater height erected.
The invention of the modern "skyscraper" has made possible the
348 PURCHASE AND SALE OF REAL ESTATE.
carrying up of buildings to practically an unlimited height, sur-
passing the renting space afforded in buildings of the old type
and construction several fold, but not necessitating an increase in
the size of the land. The cost of maintenance and the expense
in the operation of these new buildings are proportionately less
than in the old. All this, of course, has a tendency to greatly
increase the land values of this character of property.
Values of property are largely determined by the rents or
income, if it is improved, and, if unimproved, what income it
may be made to produce. The stability of property also affects its
value, — the question whether the conditions of location, etc.,
will warrant a continuation of income. This is determined by its
accessibility to transportation, etc., the properties in centers of
great population being of the highest value and receding in value
from those centers as their accessibility becomes less. The law
of supply and demand regulates to a large extent the value of
real" property the same as personal property. Property obtains
an abnormal value frequently from overconfidence due from
various causes, that are sometimes not warranted by the stability
of the community or its industries. In growing towns and cities,
all classes of real property are more or less in a transient state,
changing as the character of localities change. Thus residence
property deteriorates materially in the event of the removal of
residents to new and popular locations. As a result properties
sometimes a distance of eight or ten miles from centers of activity
are more valuable than intermediate property. Business prop-
erty then being the most staple and producing the greatest in-
come, has, of course, the highest value, and being in demand is
purchased to earn on the lowest percentage of income. Some-
times these properties are purchased to net the investor as low
as four per cent, per annum.
The most desirable form of investment in property, and by
far the safest, is to purchase land and then lease it for a long
period, usually ninety-nine years, the lessee or lessees agreeing
LEASES. 349
to pay general taxes and all other obligations incurred by tile
ownership of the land, and in addition, as security for the pay-
ment of the rent and all additions thereto, erect an improvement
on the property which he maintains during the life
Ninety-nine- Qf ^^q Jeasc, Said improvements reverting to the
Year Leases p , i i i • n
owner of the land at the termination of the lease by
purchase, or otherwise, according to agreement. It is usually a
beneficial arrangement also to the lessee, as it affords him all the
rights of ownership of the land, providing, of course, that the
ground rents and all the covenants of his lease are promptly met,
without investing a large sum of money in the title. Long term
leases of ground as previously stated, are usually made for the
term of ninety-nine years. This is only a custom, following the
old theory that a conveyance or letting of land for a period of
more than three average life times, that is three life times of
thirty-three years each, was an absolute conveyance and not a
lease. Leases may just as properly and legally be made for one
hundred years, or nine hundred years, or nine hundred and
ninety-nine years as for ninety-nine years.
Having investigated the present condition and future pros-
pects of a property and decided upon its purchase, the buyer
enters into a written contract* with the seller, or his agent, in
which the seller agrees to sell the property at an
Real Estate agreed price, to deliver a "merchantable" abstract
Contract , . '
showing a perfect title in him, and to convey the
same by deed properly executed. On his part, the buyer agrees
to buy or receive the property within a specified time, usually
thirty days, after a complete abstract of title has been furnished
him by the seller, showing perfect title in him, and to pay for the
property the price agreed either in cash or installments as agreed.
The buyer usually makes a cash deposit of about 5 per cent, of
the purchase price when the contract is executed, which is to be
♦All contracts with a reference to the purchase of real estate must be
In writing in order to be valid.
350 PURCHASE AND SALE OF REAL ESTATE.
refunded in case the transaction is not consummated through the
fault of the seller, or is forfeited to the seller in case the buyer
fails to carry out the agreement. If the transaction is consum-
mated the contract money is applied upon the purchase price.
The seller then furnishes an abstract of title, which may be
procured from an abstract company, showing the complete his-
tory of the ownership of the property to the present holder.
This is examined by the buyer or his attorney.* Past convey-
ances, encumbrances, the rights of heirs, and especially minors,
judgment creditors and many other points must be carefully
watched and scrutinized in the past history of the property. So
many questions of law are involved in the examination of titles
to real estate that a good lawyer is a necessity. Defects in titles
may be cured in various ways, many of them by
Examination sccuring quit claim deeds from possible claim-
ants by purchase or otherwise. Some defects are
cured by time, while others are incurable. Properties sometimes
lie unimproved and unsalable in our cities through some defect
in title until lapse of time cures the fault. It is needless to say
that the buyer should be absolutely safe in the quality of title
which he accepts.
The next step is the execution and "passing of the papers"
which convey title. On the part of the seller or grantor this
consists of a warranty deed signed by him and the signature duly
acknowledged by a notary. If the grantor is mar-
Passingof ricd, the wife, (or husband, as the case may be,)
must join in the execution of the deed, and, if the
grantor is a bachelor, or spinster, the fact must be recited in the
deed. The buyer, or grantee, on his part pays the purchase
money, or in case any portion of the purchase price is to be paid
at future dates, he executes notes therefor, and a mortgage or
trust deed on the property as security for their payment. The
*We have Guaranty Companies which issue policies of insurance against
defects in titles, but the examination of the abstract is the i^iost common
method.
MORTGAGE AND TRUST DEED. 861
wife or husband of the grantee need not join in the execution of
a mortgage or trust deed given to secure purchase money, but in
all other cases where such instruments are executed she or he
must so join.
As explained in a previous chapter, a mortgage is virtually a
conveyance of property to the mortgagee, with a provisional
clause that in case a certain note shall be paid upon a given date
then the conveyance described in the mortgage shall be void and
the title shall vest in the mortgagor. A deed of trust is a con-
veyance of property by the mortgagor to a third person called a
trustee, to be held by him as security for the notes given. After
the notes are paid the trustee "releases" or recon-
Mortgageand ygyg ^j^g property to the grantor in the trust
deed by the execution of a release deed. This
is the more common method of securing real estate notes.
When there is a default in one note of a series or interest
upon one of the notes, by a provision in the mortgage or trust
deed such default causes all of the notes to fall due at once at
the election of the trustee or legal owner of the notes. This is
necessary in order that action may be taken under the mortgage
or trust deed to enforce full and complete payment and avoid the
necessity for foreclosure proceedings upon each note separately.
Mortgages are still used largely by insurance corporations
in loaning their surplus capital, for the reason that they do not
expect to transfer the paper and the mortgage gives publicity to
the fact that they are the actual lenders of the money, but by
individuals the trust deed form is preferred as it enables the
owner to transfer the trust deed and notes without recourse or
publicity, the actual lender not being known in the trust deed.
In 1879 a law was passed in Illinois making the proceedings to
foreclose a mortgage on real estate and a trust deed practically
the same. Prior to that date it was not necessary for the mort-
gagee to file a bill of complaint, etc., it being only necessary for
him to advertise the property a certain number of days and sell
852 PURCHASE AND SALE OF REAL ESTATE.
it to the highest and best bidder. The law was no doubt enacted
largely in the interest of the borrower, giving him a certain pro-
tection in the event of a fraudulent foreclosure, etc.,. and for the
reason that a trust deed conveys the property absolutely under
certain conditions and enables the paper to be more readily sold
or used as collateral security for loans.
In foreclosing a trust deed or mortgage the complainant files
a bill of complaint in the court having proper Jurisdiction, making
the signers of the notes and trust deed, and all parties having
any interest in the property, defendants. The court usually
refers the case to a Master in Chancery for the purpose of taking
evidence and arriving at a conclusion as to the amount due. To
this report either parties have a right to file and argue objections
with the Master. In the event of the Master's report being
favorable to the complainant and sustained by the
Foreclosure court, a dccrcc of Sale is entered. The Master
then advertises and sells the property to the high-
est and best bidder for cash. This being approved by the court
the Master executes a certificate of sale to the purchaser, which
certificate will entitle the purchaser or holder thereof to a deed
at the expiration of the redemption period. This latter is one to
two years in different states*, — a period of time in which the
mortgagor may have a final opportunity to recover his property
by paying up his debt with interest and costs.
During the continuance of the mortgage the owner of the
property has what is called "an equity of redemption." He
enjoys the same right of ownership over the property (assuming,
of course, that interest and maturing notes are paid when due)
as though the mortgage and trust deed did not exist. He has
the right to transfer by deed, or to again mortgage the property,
subject, of course, to the rights of the holder of the previous lien.
In case the property is sold while it is under mortgage the pur-
chaser either buys it "subject to" the mortgage, or "assumes and
♦In Illinois the redemption period is fifteen montks.
EQUITY OF REDEMPTION. 353
agrees to pay" the incumbrance. In this latter event, the pur-
chaser of the property, by accepting such a deed, obligates him-
self personally to pay the incumbrance and in case of foreclosure,
if the property does not sell for enough to pay the mortgage
together with interest and costs, he may be held for the balance.
It is to the interest of the purchaser to see that the deed is
properly placed on record in the office of the Kecorder of Deeds.
If the buyer fails to record his deed and the seller should fraudu-
lently convey the property over again or mortgage
Recording it to an inuoccut person who placed his deed or
mortgage upon record first, he, the innocent pur-
chaser, would be protected in his title. The same principle
holds in regard to recording other documents. The mortgagee
must at once file his mortgage for record, lest another mortgage,
sale or judgment takes precedence over it.
FIRE INSURANCE.
CHAPTER XXXVIII.
INDEMNITY FOR LOSS BY FIRE.
HISTORY; CLASSES OF COMPANIES; RISKS; RATES.
In the "Wealth of Nations" the author* expresses the philos-
ophy and purpose of fire insurance in the following: " The
trade of insurance gives great security to the fortunes of private
people, and by dividing among a great many that loss which
would ruin an individual makes it fall lightly and easily upon the
whole society." Fire insurance makes commercial credit pos-
sible. Without it business would be restricted to a cash basis
and the future would be uncertain and unsafe.
oSect*"** Fire insurance became a necessity when people
began to accumulate property of a destructible
character. Prior to 1666, the only sort of indemnity obtainable
against loss by fire was to be secured in membership in guilds
or associations having for their object, or one of their objects,
mutual relief in case of fire loss. The great fire of London, how-
ever, which raged continuously for four days from September 2,
1666, opened the eyes of the world to the possibility of loss by
fire. Insurance by individuals, which is a common practice in
England at this time, became a business. Companies were or-
ganized and one of them established in 1696 has survived the
test of time and is in existence today. Primarily, these com-
panies were organized to extinguish fires in property belonging
to members, which property was ordinarily marked by a tin
sign. Incidentally the company assumed the loss by fire. The
*Adam Smith,
LLOYDS. 355
"fire department" idea soon passed away, and the insurance
feature only remains; and it has become an integral part of our
modern commercial structure.
There are three kinds of insurance institutions: 1. Lloyds*
or Individual Underwriters, 2. Mutual Companies and (3)
Stock Companies. In the Lloyds system an individual, or a
group of individuals acting each in an individual capacity
through a common attorne}^, enter into a contract of insurance.
The insurer known as the "Underwriter" in this case, personally
receives the premium and pays the loss, and the
Lloyds contract is just as good as the man or the men
back of it. The noticeable disadvantage of this
plan of insurance is the necessity, in case of disagreement as
to the amount of the loss, of bringing legal action against each
one of the individual underwriters separately. It is also diffi-
cult to ascertain the present or future responsibility of the un-
derwriters who are obliged neither to make statements nor to
maintain reserves for unearned premiums or other liabilities.
In England, this system of Lloyds or individual insurance has
assumed large proportions and has attained a recognized stand-
ing commercially. In the United States the system is compara-
tively unknown. Whether it can adapt itself to our conditions
successfully, is yet to be seen.
In the mutual company every member assumes a portion of
every other members' risk. The policy holders are the company.
If a loss is sustained, the policy holders are assessed proportion-
ately for the loss. Theoretically, this system of
Companies ^^^ iusuraucc should be workable; practically it has
never been successful, except in a local or special
way. Mutual fire companies confining their operations to locali-
ties where values are widely distributed, as in the case of farming
*The term Lloyds originated from a coffee house kept by Edward Lloyds
in Tower street, London, about 1688, where merchants and ship-owners
were accustomed to meet, and responsible individuals would assume risks,
either severally or jointly, for a premium consideration.
356 FIRE INSURANCE.
communities, for instance, have lasted. It is also true that
mutual fire companies, making a specialty of certain classes of
isolated manufacturing properties have been successful. But
the history of mutual fire companies, with the exceptions noted,
has been unsatisfactory in the United States.
The stock company is the fire insurance company as we com-
monly know it. It is a corporation with a paid up capital.
If conservatively conducted, it will also accumulate a
considerable surplus for the conflagrations which are sure to
come. This company files and publishes annually, statements of
its condition. It is examined by the state periodically or on
occasion, if an emergency arises. Its policies are
Companies ^^ ^ standard prescribed by law, and its agents are
licensed by the state in which they reside. The
stock company is compelled by law to set aside a specified part
of its premium income as "unearned premium." So far in the
experience of this country, this system of insurance has appeared
to be best adapted to our needs and most satisfactory for general
purposes.
The legislatures of a number of the states have passed laws
prescribing the kinds of policies that companies may use in those
states. These are called standard policies. The so-called New
York Standard Policy has been adopted in a large number of
the states as the legal policy. In addition to this, many of the
states have enacted statutes making it obligatory upon fire
insurance companies to submit their books, vouchers and securi-
ties to the inspection of an examiner appointed by the governor
of the state.
The consideration in an insurance policy is called the premi-
um. The premium is calculated at so many dollars or cents per
$100 of insurance, which is known as the rate. For example, at
$1.50 rate, $3,000 of insurance gives a premium of $45. This
is the annual premium. Policies for shorter periods
than one year are written at what are called short rates. If the
RATES. 357
annual rate is $1.00, the short rate for one month would be 20
cents; for two months, 30 cents; for three months, 40 cents, etc.,
the rate for the period becoming relatively smaller
Rates as the period approaches one year. There is an es-
tablished table of short rates showing the rate
for every possible number of days in the 365, composing
the year. On certain classes of property, term policies, or policies
for longer than one year, can be secured. On residence property,
it is the prevailing practice to write two-year policies for one
and one-half annual rates, three-year policies for two annual
rates, and five-year policies for three annual rates. The entire
term premium must be paid in advance, but the saving effected
by this plan of term insurance is considerable, and amounts to
a large interest on the anticipated portion of the premium, as
may be readily ascertained by an easy calculation.
The rate, which is the prime factor in the estimation of the
insurer, may be determined in either one of two ways. First, it
may be made arbitrarily upon the judgment of a competent
and experienced person, after a personal examination of the
property to be insured. Such rates are designated "flat rates,"
and until recently nearly all the fire insurance rates were "flat
rates." The objections to such rates were that
Schedule Rates they Were not susceptible of analysis or explana-
tion, and being made by different persons or the
same person under diverse influences, they were often more or
less inconsistent. Most of the fire insurance rates in late years
are the products of schedules. The schedule for frame buildings
is a comparatively simple one. There being no special points of
construction to be considered, the schedule has reference prin-
cipally to the matters of occupancy and exposure.
The schedule for brick buildings is a more complicated affair.
In this case there is a basis rate for a standard building not over
a stated height and specified ground area. The figure set for this
standard building is known as the "basis rate/' and it is intended
358 FIRE INSURANCE.
to measure the sufficiency of the local water supply and fire pro-
tection, together with other conditions calculated to affect the
general fire risk of the locality. To this basis rate
Basis Rate is added charges (made according to carefully pre-
pared tables compiled from the best obtainable ex-
perience) for the following items entering into the fire risk.
The items here given are from the schedule for brick mercantile
buildings of ordinary construction in use at present in the City
of Chicago, Illinois.
1st. Height. For each story over the standard height, a
charge is made; this charge increases with the stories, because
the difficulty of reaching and extinguishing a fire increases in
proportion to the height of a building.
2d. Area. The risk of spreading fire increases directly as
the area of the building and a charge is made for area, over
standard, accordingly.
3d. Walls. To protect the building from adjoining build-
ings and to bear the weight of its contents, a building should
have walls of certain strength, and deficiency in that respect is
charged for in the schedule.
4th. Communications. An opening into an adjoining build-
ing makes possible the communication of a fire. If the com-
munications are unprotected, the buildings are rated as one risk.
If the communications are protected by proper iron doors, there
is a charge made on the theory that the doors may not be shut
in case of fire; this charge increases with the number of such
communications.
5th. Exposures. Charge is made for exposure based upon
the seriousness of such exposure, its nearness and the precau-
tions taken to guard against the exposure.
6th. Elevator shafts. Unless built of non-combustible ma-
terial with fire-proof doors at each fioor, an elevator shaft acts
as a flue to carry a fire to every floor in the building, and is
heavily charged for under such circumstances.
RATES. 359
7th. Floor openings. Stairs and other minor floor open-
ings act much as an elevator shaft, though in less degree, and
they are charged for accordingly.
8th. Condition. It is becoming more and more the prac-
tice in schedule rates to charge for unsafe condition of premises.
These charges are intended to be temporary in their nature, and
are supposed to measure the hazard existing by reason of poor
condition of premises. As soon as the premises are put in safe
condition the charge is removed. By reason of careless man-
agement, however, charges for condition often amount to a
permanent charge, and become an unnecessary tax on the
business.
Credits are allowed for protection intended to prevent the
inception or the spread of a fire. Stand pipes with ladders on
buildings, giving assistance to firemen, are the basis for a credit
of one cent for each story. Automatic fire alarm service, or
telephone watch service reporting to a central station is a
large measure of protection, and for these a credit of ten per
cent, of the building rate is ordinarily allowed.
Credits Special construction, such as open mill construc-
tion, and other superior construction, is encour-
aged by an allowance in the rate. Automatic sprinklers (a sys-
tem of piping through a building with faucets which are opened
by the melting of a fusible link, back of which are adequate
water supplies in gravity or pressure tanks), afford the best
protection known at this time against the spread of fire, and for
this system of protection a very considerable credit is allowed in
the insurance rate.
There are other charges and credits, but the ones cited will
suffice to explain the theory on which the unoccupied building
rate is constructed in the process of schedule rat-
Buiiding Rate ing. After the unoccupied building rate is ascer-
tained, a charge is made for the occupancy, accord-
ing to the hazard of such occupancy, and the result is the rate
360 FIRE INSURANCE.
at which the building insurance is written. Applying these
principles for an example, we might find such a case as this:
"Basis rate" (4-story) $0.40
Height (6 stories) 15
Area (5,000 ft. excess) 10
Walls (deficient 2 stories) 04
Communications (one protected) 10
Exposure (frame — no shutters) 15
Elevator Shaft (lath and plaster) 10
Floor Openings (6) 06
Gross unoccupied building rate $1.10
Credit for standpipe and ladder $0.06
For automatic alarm (10 per cent.). . .11 .17
Unoccupied building rate 93
Occupancy — Crockery with packing 10
Occupied building rate $1.03
Having ascertained the rate on the building (which in this
case is made more than ordinarily complex, for the purpose of
illustration) the next step is to calculate the rate on the contents.
On the theory that any brick building is better than its con-
tents, there is added to the occupied building rate a certain sum
intended to measure the susceptibility of the contents to damage
by fire or water. For example: Boots and shoes
Contents ^^ cases would classify twenty-five cents more than
the building. An open stock of dry goods, 50
cents; a millinery stock, 80 cents, and a stock of tobacco, $1.00.
Taking the crockery stock, for example, there would be added
to $1.03 (the occupied building rate) 45 cents for a crockery
stock, making the rate on the contents, $1.48 per $100 of in-
surance per annum.
If there is more than one tenant in the building, on the
RATES. 861
theory that each additional occupant introduces some moral
and physical hazard, there is a charge made, the amount of which
charge is determined hy the nature of the occupation. If a
stock of merchandise occupies but one floor in a build-
ing, it is charged for location. The grade floor is standard, with
no charge for location. In the basement, ten cents are added
for liability to water damage, while above the first floor, the
^^loading"* for each floor is the square of the floor occupied. For
example the loading for the second floor is four cents, the third
floor nine cents and so on. The loading for stocks occupying
more than one floor is obtained by striking an average for the
floors occupied. When the entire building is occupied by a
single concern no floor loading is made.
For buildings of fire-proof construction there is a "fire-proof
schedule," designed to meet the different and complex conditions
found in this important class of risks. Likewise for manu-
facturing risks, there are special schedules intended to measure
the hazards existing in the different processes of manufacture
with credits for safeguards calculated to eliminate or reduce such
hazards.
♦Loading is a term used for additions to the basis rate on account of
location or ot^er special conditions.
CHAPTER XXXIX.
FIRE INSURANCE— Continued.
BOARDS OF UNDERWRITERS; CO-INSURANCE; LOSSES.
Boards of Underwriters are associations composed of the
representatives, managers or agents of insurance companies
doing business within the state in which the association has
jurisdiction. Such boards are either organized under the laws
of the state, or are voluntary organizations for mutual benefit
and protection.
It is the function of Boards of Underwriters to prepare and
apply schedules for rating the risks located within their juris-
diction. At the present time, as schedule rating is little more
than in its infancy, there are many inconsistencies in rates on
similar risks in different localities. Gradually as the scheme of
schedule rating develops, the comparisons of experience of dif-
ferent localities and the suggestions from central
Underwriters Organizations of companies will equalize these in-
consistencies and make the schedules more uni-
form. It will not be long before the merchant or manufacturer,
who now has the satisfaction of knowing that his local competi-
tors are rated under the same schedule as himself will have the
added satisfaction of seeing his outside competition rated under a
schedule so similar that it amounts to the same for all practi-
cal purposes. Nevertheless, it will always be true that certain
classes of risks will be more profitable in one locality than in
another. This, by reason of natural advantages and the absence
of moral hazard, and this the fire insurance rate must always
take into account. Absolute uniformity in schedules throughout
a wide territory is hardly practicable on that account.
BOARDS OF UNDERWRITERS. 363
In addition to the business of making rates, the local board
of underwriters has other and important duties to perform. Its
corps of trained inspectors is constantly at work to reduce the
local fire hazard by requests, failure to comply with which, after
a reasonable time, subjects a risk to an increased rate for poor
condition. The local board of underwriters stands also as the
protector of the public water supplies, and it has not infrequently
happened that boards of underwriters, in large cities, have
brought about the separation of the fire department from politics.
Intelligently administered, a local board of underwriters can
be of large service in a public way.
With the exception of rates of insurance on residence prop-
erty, practically all fire insurance rates are now based on an
amount of insurance to be carried equal to 80 per cent, of the
actual cash value of the property insured. This agreement,
which is a special one written in the policies, is variously known
as the "80 per cent, clause" or the "reduced rate agreement."
Its present use grew out of conditions such as
Co-Insurance this: One merchant with a stock valued at $10,-
000 rating 1 per cent., insured his stock for $4,000
at an annual premium of $40, carrying the rest of his risk him-
self. Another merchant also with a stock valued at $10,000 and
a 1 per cent, rate would insure for $8,000 and pay an annual
premium of $80. In case of a $2,000 loss on each of these stocks,
the companies would sustain a 50 per cent, loss on
the first stock and a 25 per cent, loss on the second. That is,
the companies would be obliged to pay $2,000 on a $4,000
policy in one case and $2,000 on an $8,000 in the other. In
case of a $4,000 loss on each stock, the loss to the companies
would be total in the first case and 50 per cent, in the other. A
plan of rating which permitted such inequality was certainly
wrong. The merchant carrying 80 per cent, insurance in this
case, was twice as good a risk to the companies as the merchant
carrying 40 per cent, insurance, and it became evident that the
364 FIRE INSURANCE.
rate must be conditioned on some definite percentage of insur-
ance to be carried. Eighty per cent, insurance was generally
agreed upon as a fair requirement. Companies were quite willing
that the property owner should be interested in his own risk,
to the extent of taking the last 20 per cent, of fire risk, if he
desired to do so. There is nothing in the 80 per cent, agree-
ment, however, which prohibits a property owner from insuring
100 per cent, of his value, if he prefers. He may likewise, if he
chooses, carry but 70 per cent, insurance, in which case he pays
10 per cent, additional rate, for the greater liability to the com-
panies of a heavy loss. For 60 per cent, insurance, 20 per cent,
penalty is added, and for 50 per cent, insurance, the penalty is
30 per cent. With less than 50 per cent of insurance, few com-
panies would carry an ordinary risk.
Notwithstanding its general use, the 80 per cent, clause is
widely misunderstood by intelligent business men, the common
fallacy being that under this clause the companies agree to pay
80 per cent only of a loss. The actual operation of an 80 per
cent, agreement, in case of a loss, can best be illustrated by
examples: Suppose a stock, the cash value of which is $20,-
000, requiring $16,000 of insurance under the 80 per cent, agree-
ment, should be partially destroyed. In the first example, let there
be $10,000 insurance, the companies pay ten-sixteenths and the
owner loses six-sixteenths. In the second example, have $12,-
000 insurance, companies pay twelve-sixteenths and owner loses
four-sixteenths. In the third example, with $14,000 of insurance,
companies pay fourteen-sixteenths, owner loses two-sixteenths.
In the fourth example, there is $16,000 insurance. Here the
conditions of the guaranty are complied with, and the companies
pay all of the loss provided it does not exceed the face of the
policy. If over 80 per cent, of insurance is carried, the guaranty
is still fulfilled, and the companies pay the entire loss. In such a
case, however, the loss would be spread over a larger amount of
contributing insurance and fall lighter on each company, if
there were more than one company.
POLICIES. . 865
It is desirable, on occasion, for an insurer to secure a policy
covering property indefinitely located, as, for instance, covering
merchandise, being received at and shipped from freight depots
and docks. Or on rented pianos beyond the control of the owner.
Or on merchandise being manufactured and in the
fnsura^ifce hauds of tailors or other artisans. In such cases,
and they are numerous, it is usually possible to
secure a "floating policy," covering anywhere, with some rea-
sonable restriction as to the amount for which the company
shall be liable in one fire, and a further provision as to the per-
centage of insurance to be carried. Such floating policies are
usually at a relatively high rate, because of the uncertain and in-
definite liability assumed by the company.
It is often convenient for a merchant occupying two or more
buildings, or a manufacturer with a plant consisting of several
buildings, to secure a policy covering stock in the several build-
ings or covering the entire manufacturing plant and its contents.
This can ordinarily be done under what is termed
PoUcies "^ blanket policy" which is written to cover the
entire subject of the insurance in or on the several
buildings. The rate for a blanket policy is arrived at by calculat-
ing the premium on the value in or on each specific building at
its individual rate, and dividing the aggregate premium thus
obtained by the total amount of insurance. The result would be
the average rate.
An insurance contract is not, as some think, a "promise to
pay" a specified sum in case of fire. Neither is it, as some would
have it appear, a one-sided contract by which the company can
avoid a legitimate claim. In the nature of the case an insurance
contract is drawn in general terms to be used in
Contract a Variety of conditions, and it cannot have the
directness or brevity of a single and ordinary con-
tract between two parties. There are a few general features,
however, of an insurance policy or contract, which, if known,
366 . FIRE INSURANCE.
would assist greatly in a clear understanding of its terms, and
do much toward the avoidance of possible differences. At the
outset let it be understood that the insurance contract is per-
sonal. It insures somebody (not anybody) against loss by fire.
Any change in ownership must be consented to by the company
in writing. The subject of the insurance must be definitely set
forth in the written portion of the contract. A policy on a
stock of boots and shoes, for instance, does not cover groceries
or dry goods. Any change in the character of the property
insured should be immediately and fully endorsed in writing
on the policy.
In lines 16 and 17 of the New York Standard Policy, it is
stated that the entire policy shall be void "if the interest of the
insured be other than unconditional and sole ownership," "un-
less otherwise provided by agreement endorsed hereon." Failure
to conform to this provision of the contract is pro-
Own^rship"^ lific of troublc. If the ownership is not sole and un-
conditional, the character of the ownership should
be fully set forth. For illustration, if a building stands on
leased ground, if the ownership of property is partial or con-
tingent, if the property is incumbered or under contract, these
facts should be clearly stated in the policy.
The policy also provides that any change in title or posses-
sion of the property will render the policy void unless consent
of the Company is first obtained in writing. The object of this
requirement is to place the Company in possession of all facts
relative to each risk. If a change is made for any cause then
the party insured should notify the Company through its local
agent and obtain written consent to the change.
Ownership ^^ ^hc party insured disposes of his interest in any
property covered by a policy of insurance it is
absolutely necessary that the policy should be assigned to the
purchaser and consent of the Company obtained to the transfer
or the policy will become void. A change from an individual
OWNERSHIP. 867
ownership to that of a copartnership, or to an incorporated
company, or where one partner retires from a firm or a new
partner is admitted to the firm, is a change of ownership of firm
property and affects the insurance at once, making the policy
void unless the company is notified and its consent obtained in
writing.
In lines 39 to 44, inclusive, of the New York Standard
Policy are set forth certain articles which are not insured unless
specifically named:
"Unless liability is specifically assumed hereon, no loss to
awnings, bullion, casts, curiosities, drawings, dies, implements,
jewels, manuscripts, medals, models, patterns, pictures, scientific
apparatus, signs, store or office furniture or fixtures, sculpture,
tools; nor property held on storage or for repairs; nor, beyond the
actual value destroyed by fire; nor loss occasioned by ordinance
or law regulating construction or repair of buildings; nor by in-
terruption of business, manufacturing processes, nor otherwise;
nor for any greater proportion of the value of plate glass, fres-
coes, and decorations than that which this policy shall bear to the
whole insurance on the building described.''
If any of these are to be insured, they must be incorporated
in the written portion of the policy. With the exception of
certain floating policies, already described, an insurance policy
covers property "all while contained," in a certain specified
building or buildings. Any change of location therefore should
be at once endorsed on the policy.
Lines 11 to 30 of the Standard Policy set forth certain con-
ditions under which the policy is voided, unless consent is en-
dorsed in writing. Generally stated (and excepting reference
to title, already explained) these conditions are: The procure-
ment of other insurance, the operation of a factory after 10 P. M.
or ceasing to operate for more than ten consecutive days, any
increase of hazard within the control or knowledge of the in-
sured, the making of extraordinary alterations or repairs, the use
868 FIRE INSURANCE.
or storage of volatile products of petroleum or other explosive
or highly inflammable substances, the vacancy or non-occupancy
of a building for more than ten consecutive days. Permission
for any of these may be obtained, in ordinary cases, on applica-
tion to the agent of the company, which permission should be
fully endorsed in writing on the policy. It should always be
remembered that a fire insurance policy is a contract, subject to
the general law of contracts, that usage does not nullify its
conditions and that once voided, it can only be revived by the
consent of both parties.
When it is desired to place a policy of fire insurance as
collateral security with a bank, or with a mortgagee no written
assignment is necessary, but in such cases the policy should
contain a clause "loss, if any, payable to
cuuse*^*^^* as his interest may appear." This is the "loss
payable clause" and is usually made in favor of
the trustee of the trust deed securing the loan. This clause
must be inserted by the company or its agent.
Among Insurance Companies it is the custom for some com-
panies to issue a policy for a larger amount than they desire to
carry themselves and in order to reduce their line on the risk
they ask some other company or companies to re-insure their
liability under the policy for a certain amount, and for this
they pay the other company a consideration called the pre-
mium. The original insured has no claim on the re-insurance,
his contract being with the company whose policy he holds.
Comparatively few policy holders sustain a fire loss. Other-
wise the companies could not afford to issue $1,000 policies at an
average premium of about $10. There must be a goodly per-
centage of "safe risks." Nevertheless there is but
Loss Claims one Way to transact fire insurance business, i. e.,
on the theory that there will be a loss and at once.
A fire insurance company conducting its business on any other
theory would become insolvent and a merchant or manufacturer
LOSS PAYABLE. 369
who is careless, negligent or tardy about his fire insurance
will very likely come to grief. It behooves a man to place in-
surance at once when the need for it arises, have the policy is-
sued, examined, paid for and put away for safekeeping with the
same care and promptness that marks his banking or other im-
portant business.
When a loss comes, there is a natural and regular order to
pursue, attention to which will save time and expense to the
insured and company alike. First, notify the company or its
agent. Then set about diligently to protect the property from
further loss. After doing this set out to carefully ascertain the
amount of the loss. If the property is a building, have com-
petent persons furnish an estimate of the cost of repairing the
damage. If the property is personal, prepare a schedule, setting
forth in one column the sound value, and in the other your
opinion of the loss or damage. With specific information of
this character in your possession you are in a position to ne-
gotiate with the company's adjuster intelligently and promptly.
In case of disagreement with the company as to the amount of
loss the policy provides for an appraisal by three competent and
disinterested persons; one to be selected by the insured; one by
the company, the two thus selected choosing the third. If the
property is personal and totally consumed by fire, the value of
a good set of books and a complete inventory cannot be over-
estimated.
LIFE INSURANCE,
CHAPTER XL.
INDEMNITY AGAINST MISFORTUNE.
HISTORY; METHODS; KINDS OP COMPANIES; KINDS OF POLICIES.
Life insurance is the combination of prudent men against
misfortune. It is an invention of civilization and a practical
application of the principle of co-operation, by which many con-
tribute small sums to indemnify one, or his heirs
Definition against misfortuuc. Property may never burn,
but every life must terminate, and hence the argu-
ment of prudence and safety applies even more forcibly in favor
of life insurance than that of property. Nothing is more un-
certain than the duration of human life, and yet the problem
of this uncertainty has been reduced to a moral certainty by a
long period of observations and classified statistics which form
the basis of the business of life insurance.
The mathematical doctrine of probability was first, enun-
ciated by Pascal, the great French scholar, in 1654, and has
since been elaborated by other writers. In 1671 De Witt applied
it to the duration of human life. Gradually the death rate under
definite conditions became established from carefully preserved
records. This result is known as the mortuality
Pr<^abiiities tablcs. Thcsc tablcs represent the probability of
death of various classes of persons under varying
conditions, based upon past experience. Nothing is more re-
liable than the laws of average when applied to a large number
of cases, and hence the business of life insurance is not specu-
370
METHODS. 871
lative, but capable of the most exact and conservative manage-
ment.
Life insurance was unknown to the ancients. It originated
in England early in the eighteenth century, but the first regu-
larly organized company began business there in 1765. The
early companies did not require a medical examination as a part
of the application for insurance. The rates of premium were
fixed by guesswork, and a board of directors passed
History upon the applications for insurance. The business
of life insurance has grown to enormous propor-
tions and to a greater extent in the United States than in any
other country. In 1850 there were perhaps a dozen "old line"
life insurance companies in existence in this country. Today
we have about eighty companies with a total amount of insurance
in force of over $10,500,000,000, having assets of over $2,100,-
000,000 and a surplus of over $300,000,000.
Two methods of life insurance are employed. The first is
where a fixed and uniform rate of premium is charged, known as
the "level premium" plan, because of the uniformity of the
premium charged throughout a given period. This class of in-
surance is usually carried on by regularly organized companies,
either stock or mutual, and known as "old line" companies.
The level premium plan provides for the payment
Two Methods to the Company of more than the amount necessary
to cover the risk during the early years of the
policy, and the surplus thus accumulated is set aside as a reserve,
or invested in securities, which, with interest will be sufficient
to make up the deficiency in later years. The second method
is known as "assessment" insurance in which each member of
the association is required to make payments into the general
fund for the settlement of death claims, as the needs of the asso-
ciation may require, or at stated intervals.
It is a well established rule that the insurer must have an
insurable interest in the life to be insured for indemity is the
372 LIFE INSURANCE.
fundamental idea in all insurance. Insurance without being
coupled with an interest would be a species of gambling. An
insurable interest, however, does not consist of the ties of rela-
tionship, nor dependence for support upon the life insured. In-
surance may be taken out upon the life of anyone
Interest ^ whosc death would cause financial loss to the bene-
ficiary. In England and other European countries
it is not unusual for business men to take out insurance on the
life of their ruler to protect them from the financial loss that
would be entailed by his death. Such insurance is procured with-
out medical examination, or even the knowledge of the insured.
In America this class of insurance is not written, but in every
case it is necessary that the applicant should pass a medical exam-
ination and some companies require an investigation into the
moral character and financial standing of the insured.
Life insurance companies are divided into two classes, viz:
Stock and Mutual. A stock company is one which is owned by
stockholders, the same as other corporations, who control its
management and divide its profits. In some stock companies,
however, the policy-holders are allowed a voice in the manage-
ment, and in this respect they partake of the na-
ulrcompanies ' *^^^ ^^ mutual Companies. Such companies may
be called "mixed." In a stock company ordinarily
the policy holders have no share in the management of the com-
pany. A mutual company is one which is composed of policy
holders who elect the directors of the company and participate
in the earnings. The two kinds of companies, however, usually
operate on the same general business methods. The mutual
companies are the more numerous.
The method of insuring lives which naturally first suggested
itself was to make the contract of insurance for a single year,
and then renew or extend it from year to year, after the manner
of fire or liability insurance, increasing the rate of premium as
the risk increased. There is the more reason for short term con-
CONTRACT OF INSURANCE. 378
tracts in life insurance since the risk is constantly changing.
The insured is growing older and may at any time develop symp-
Annuai and ^^"^^ ^^ discasc. Thus from birth to the age of 10
Long Term ycars the risk is constantly diminishing and then
very slowly begins to increase until after middle
life, when it increases at a constantly accelerated ratio.
On the other hand, a property risk may remain substantially the
same from year to year.
The contract of insurance is based on the application on the
part of the insured, containing his "warranties, promises, con-
sents and agreements," together with statements of the com-
pany's medical examiner. The application of the
Insurance assurcd, together with the payment of the pre-
mium, constitute the consideration upon which
the company's obligation rests. On the part of the company, its
agreement is evidenced by the policy of insurance. A great
variety of covenants and conditions are embodied in such pol-
icies. The nature of these will be considered under the title
"kinds of policies." In other branches of insurance, the com-
panies may cancel the policy at any time by returning a pro-
rata portion of the premium, but this is not so in the case of
life insurance. A contract once entered into and
brca^n«ied°* ^ ^^^^ assumcd, is binding upon the company to
the end of the term, unless cancelled by the consent
of the insured. To rule otherwise would be a great injustice
to the insured since it would leave him without insurance per-
haps at a time in life when he could not procure it elsewhere.
Life insurance policies may be divided into four general
classes, viz: Term, Life, Limited Life and Endowment. Any of
these may be purchased by a single payment of
piudes premium, but the usual method is to pay the pre-
mium by annual or semi-annual installments.
The formalities to be complied with are similar in all policy con-
tracts— application, medical examination, etc. A term policy
374 LIFE INSURANCE.
merely provides insurance for a certain number of years, at the
expiration of which it terminates and has no value. This is the
oldest form of policy. A condition is sometimes
Term inserted in a term policy providing that it may
be renewed at an increased rate at the end of the
period without a medical examination. Policies of this char-
acter are called "renewable term" policies.
Life policies provide for the payment of the face of the policy
at the death of the insured, whenever that may occur. A whole
life insurance is thus seen to be a term insurance
Life for the duration of possible life. Ordinary life
policies provide for the payment of premiums
during the life of the insured.
Limited life policies are those in which it is provided that
after a certain number of payments no further payment of
premiums is necessary, and that the policy is fully
Limited Life paid up. The poHcy may then be held by the
insured as an asset awaiting realization upon his
death. The periods for the payment of premiums under such
policies are usually 10, 15 or 20 years.
An endowment policy is one which provides that its face
value shall be payable to the insured at the end of a fixed period
(10, 15 or 20 years as the case may be) if he sur-
Endowment vivcs, or to the beneficiary if he dies within the
period. This form of insurance was introduced
later than the other usual forms. It was expected that it would
be the means of inducing many persons to insure, who would not
otherwise do so, in the hope of receiving the face of the policy
during their lifetime. It especially appeals to those who
desire to provide against need in old age. Apparently those who
take endowment insurance are conscious of superior vitality,
since the death rate among endowment policy holders is espe-
cially low.
While different companies have many variations and
POLICIES. 375
designations for their different policy plans, each policy has as
its foundation one of the above forms. Thus a "single premium"
policy is one upon which the premium is paid in one amount
when the policy is issued. Policies of this kind are written
Single Premium ^^^^^r both the life and endowment plans. Again,
Continuous an installment policy is one of the above forms of
nstaiments insurance providing that in case of death, instead
of the face of the policy being payable in one sum, it is to be
paid in a certain number of annual installments (usually twenty),
or it may provide that a certain amount shall be paid yearly
as long as the beneficiary lives, and should she die before twenty
years has elapsed the balance of the twenty payments shall be
payable to the beneficiary's estate. In that case it would be
called a "continuous installment" policy.
Another form of insurance properly called an "installment-
annuity" policy, provides that half the face of the policy shall
be payable in twenty annual installments or forty semi-annual
installments, the other half of the policy to be
Not a 5 ^ Bond paid at the end of twenty years in one sum. Many
companies give this form of insurance a name
which is to some extent misleading, by calling it a 5% bond.
They charge a higher premium per thousand and represent the
face of the policy as being paid in twenty years. The twenty
annual payments are called coupons, or interest payments. While
this form of insurance is an excellent investment in certain
cases, the term 5% bond is misleading in that people are induced
to believe that they have an investment paying 5% interest.
Still another form of installment insurance is called a "sur-
vivorship annuity" policy. This policy provides that a certain
Survivorship amount shall be payable yearly to the beneficiary
Annuity as loug as he or she lives, all payments stopping
Policies ^^ j^.g ^^ Y^Qj. death. Should the beneficiary die
before the insured, the policy lapses. Some companies provide
that the premiums shall revert to the insured in event of the
876 LIFE INSURANCE.
prior death of the beneficiary. This form of policy is designed
to furnish protection to a wife or other dependent relative after
the death of the insured who is the source of support.
A policy is sometimes issued upon the lives of two people,
payable upon the death of the first. Such are called joint-life
policies. They are sometimes taken by husband and wife, in
favor of their children, or they may be payable
Joint Life to the survivor. More frequently they have been
taken out by firms upon the joint lives of the
partners, and payable to the surviving partner, thereby furnish-
ing him with sufficient ready cash to buy out the deceased part-
ners' interest in the business. For this reason it is commonly
known as partnership insurance. To accomplish the same result,
partners sometimes insure the lives of each other, thus making
separate policies instead of joint life. On some accounts this
is preferable to a joint-life policy, since in case of a dissolution
of the firm the joint policy cannot be divided.
There are many firms and corporations whose prosperity is
often dependent on the ability of ita president or manager and
the stock-holders would suffer heavy loss in case of his sudden
death. This is especially true where a man of ability, but with-
out large financial means is carrying on an extensive businesa
on other people's money. Many such concerns carry enormous
lines of insurance upon the life of the man through whom they
have so much at stake.
A very few companies have a scheme which they attach to
policies, providing that instead of the insured paying all of the
premium, the company will loan him a portion of it each year
at interest. The idea held out is that annual divi-
Loan Plan dcuds will carc for all or a large part of the loan.
This plan cannot be condemned too strongly, as
it results in an unsatisfactory condition. If the insured pays the
interest on these loans whose amount is increasing yearly, as
more premiums fall due then he has a constantly decreasing
PREMIUM LOAN. 877
amount of insurance at a rapidly increasing rate. But if both the
loan and interest are allowed to accumulate, there is a more
rapidly decreasing amount of insurance at the same rate. In
either event when this kind of a proposition matures there is
likely to be a Very much dissatisfied policy holder.
A few companies issue what is called Industrial Insurance.
This class of insurance is issued on all ages from one to seventy
years, in policies ranging from very small amounts
Insurance ^P ^^ ^^^^ ^^ ^^^^' ^hc amouut sold is almost
marvelous. It is, of course, sold principally to
people of very limited means.
Several companies insure women on exactly the same terms
as men, others charge an extra premium or limit them to certain
plans of insurance, while some companies do not insure women
upon any terms.
CHAPTEE XLI.
LIFE INSURANCE— Continued.
PREMIUMS; DIVIDENDS; LOANS; ANNUITIES; ASSESSMENT
INSURANCE.
Premiums are payable on definite days and unless the policy
provides otherwise, the payments must be ma,de with absolute
promptness. A grace of thirty days is allowed under some
policies, and one month under others, after the
Premiums ^^^^ ycars' premiums are paid. The insured
should distinguish between thirty days and one
month in this case, as otherwise the policy may be allowed to
lapse by failure to make payment on the proper day.
There are two principal ways of disposing of the profits in
mutual companies arising under life insurance policies, viz: —
annual dividends and accumulation of dividends.
An annual dividend policy is one in which the profits are
payable in cash to the insured each year as they accrue. An
accumulation policy is one in which the profits
Dividends ^rc allowed to accumulate for a given term of
years usually for the length of time the policy
has to run. When dividends are deferred for periods of five, ten,
fifteen or twenty years, the option is usually given the insured
to withdraw the accumulation in cash at that time or apply it
to increase whatever form of surrender value is selected. Under
accumulation dividend policies, no part of the profits already
accumulated is paid in the event of withdrawal or death during
the dividend period. Different companies have different designa-
tions for an accumulation policy, a few of which are "tontine,"
"semi-tontine," "deferred dividend" and "distribution" policies,
all of which are based upon the same general principle.
378
DIVIDENDS. 879
A favorite method of a few companies is to guarantee a cer-
tain dividend on a policy and call it a "guaranteed dividend"
policy. Another plan of theirs is not to pay any dividends on a
policy but to make a definite guarantee of a dividend payable at
maturity of the policy. Such is called a "non-participating"
policy, meaning that it does not participate in the profits of the
company. A guaranteed dividend policy, unless it provides for
additional dividends, is in reality also a non-participating policy.
As several elements go to make up the profits of a company,
such as mortality, interest rates, lapses, expenses, etc., a life
insurance company never makes a guarantee without a loading
of the premiums for all contingencies. "Loading" is a certain
allowance made and added to the premium in order to cover
unexpected losses or expenses before making a guarantee. While
guaranteed dividend and non-participating policies have their
uses, it should be remembered that any results procured under
either would have been received under a dividend paying policy
and also usually a considerable amount of profits from the load-
ing of the premiums which a company very seldom has use
for, but for which every insurance company must make allow-
ance in order to be perfectly sound and safe under all possible
conditions.
While there is a great variance as to the wording of life in-
surance policies in reference to their restrictions and conditions
there is almost as much difference in reference to the relative
advantages in case of the lapse of a policy before its maturity.
In many companies after a policy has been carried
frTsuralfct three years or more it has some value, provided
the policy is surrendered to the company issuing
it within a certain length of time. In some companies a policy
would have a value, had only one annual premium been paid
thereon.
Some companies provide, in case of lapse, for a paid-up
policy for a smaller amount payable at death no matter when the
380 LIFE INSURANCE.
insured should die tliereafter, while other companies have a pro-
vision that the policy shall run on for a certain period of time
for its original amount of insurance, the length of the extended
insurance of course being dependent upon the value of the policy
at the time of its lapse. Some companies also provide cash
values and loans in lieu of paid up or extended insurance. The
policies of many companies provide that within a certain length
of time a lapsed policy holder may be re-instated, provided
he is in good health and pays back premiums with interest to the
date of his re-instatement.
When a few years ago the privilege was given the insured
of surrendering his policy in exchange for one of paid up insur-
ance, it was called a "non-forfeiture" provision. And when
upon failure to pay a premium the insurance is
Non-forfeiture extended by virtue of former payments, this is
called "automatic non-forfeiture." Under a non-
forfeiture policy it is now customary to permit the insured to
resume the payment of premiums at any time before the value
of the policy has become exhausted by lapse, the past due pre-
miums and interest thereon being paid in cash or permitted to
continue as a loan from the company.
The policies of many of the companies are now made in-
contestable after a limited period, and one great company issues
a policy which is incontestable from the date of issue. Such
policies were issued in England before they were
Incontestability introduced here, an extra premium being charged.
By this clause the company waives its right to
contest the validity of the policy for any reason whatever, and
yet it is a question whether, in case of fraud, the company would
not have the right to contest.
The policies of many companies provide that after the in-
surance has been carried two, three or five years, according to
the method of each particular company, the company will make
liberal loans on the policies as collateral security, at a reasonable
AN INVESTMENT. S81
rate of interest, usually 5%. Life insurance policies are also fre-
quently used as security for loans from banks or brokers. Debt-
ors are sometimes required by their creditors to
Loans take out insurance for the benefit of the latter,
so that if the debtor should die, the debt will
be provided for.
Life insurance policies may be assigned the same as any other
valuable asset. Unless payable to the insured himself or his es-
tate, the beneficiary must usually join in the assignment, but
the policies of many companies are so written that the insured
may change the beneficiary under the policy at will without her
consent or knowledge. Of course the company must consent
to the assignment.
The modern life insurance policies on limited payment life
and endowment plans are so written, that in case the insured
lives to the date of its maturity he will have a good
an investme"t^^ investment. It must of course be understood
that strictly investment insurance is written on
an endowment plan. Take for illustration a 20-year endowment
policy of $1,000 which matures for a little over $1,500 in cash
at the end of 20 years, provided its profits will have been allowed
to lie and accumulate. Such a policy will have made about 4%
compound interest and furnished insurance for 20 years without
cost.
Stringent laws in- nearly all the states regulate the character
of the investments of the policy holders' money and safe guard
his rights in so many ways that it is practically impossible for
an old line life insurance company to fail. Every company is
forced each year to lay aside a sufficient sum of money which
compounded at a given and very conservative rate of interest
will be sufficient to pay any guarantees contained in its policies.
For instance, in the case of an endowment policy the amount
laid aside each year must be sufficient when compounded either
at 3 of 4% interest according to the rate used to produce one
883 LIFE INSURANCE.
thousand dollars at the end of twenty years. The amount of
assets is so enormous that the companies are able to hire
the best financiers that are obtainable, each a specialist in his
line, to handle and manage their vast interests. These men have
a knowledge of how and where to invest money that the poor
man or the man in moderate circumstances has no means of
knowing. Insurance provides a way whereby the poor man can
invest fifty or a hundred dollars a year to as good an advantage
as the wealthy. It must not be assumed, however, that those
in moderate circumstances are the only ones who invest in life
insurance from either an investment or from an insurance stand-
point, as our best and wealthiest business men are found to be
the heaviest carriers of insurance.
Originally when one failed to pay the premium promptly
on the day it was due he divested himself of all rights and
equities under his policy. Under the level premium plan, it
must be remembered that the insured pays a higher rate during
the first part of the term than the insurance actually costs in
order to counterbalance any deficit which may arise in case
he should live to an old age. Now if for any rea-
vaiues'^*'^ son the policy is allowed to lapse, it is apparent
that the insured has overpaid the cost of insurance.
Out of this condition has grown the doctrine of the surrender
values of life policies. In 1861 a law was enacted in Massa-
chusetts called the "non forfeiture" law, requiring all companies
to give extended insurance as a compensation to the insured in
case of lapse of policies. About this time the New York Life
Insurance Company introduced a policy of whole life insurance
paid up in ten years and inserted the condition that it could be
surrendered after being in force for two years, for paid up whole
life insurance for as many tenths of the original amount as full
years' premiums had been paid. Other companies adopted the
policy of allowing liberal surrender values in the form of in-
surance. The next step was to make the surrender value payable
SURRENDER VALUE. 38«
in cash and this ca«ie in 1880. Most policies, after being in force
for a period may now be surrendered for paid up insurance, for
a cash value or for a life or temporary annuity.
As previously stated, many policies now provide that at their
maturity the insured may take an income for life instead of
taking cash or paid up insurance. In England and some parts
of continental Europe, the custom of purchasing annuities has
been in existence for a very long time. In America, however,
the custom has begun to grow only within a com-
Annuities paratively short time. An annuity is usually pur-
chased by the payment of a lump sum to a life
insurance company. The company issues a contract to pay a
certain amount yearly to the annuitant as long as he or she
may live, the annuity stopping at the annuitant's death. An an-
nuity is also issued with the provision that if the annuitant dies
before receiving the amount of his or her original payment back,
the insured balance would be payable to the annuitant's estate.
A large amount of insurance in this country is supplied by
fraternal or assessment associations upon the plan of assessing
all survivors pro rata in case of the death of a member. The
success of this plan depends upon keeping the association sup-
plied with constant accessions of new members who are young
in years in order that as the policy holders attain greater ma-
turity of years the average death rate may not
fns^urance"* ^^ iucrcascd SO as to cause an increase in the
frequency of the assessments. For if the death
rate increases the effect is to drive out the young members, pre-
vent young and healthy lives from coming into the association
and leave only the old and decrepit members who are unable by
reason of their advanced years to obtain insurance elsewhere.
Some of these fraternal associations are now accumulating a
reserve, while others have adopted the plan of a graded assess-
ment, increasing as the insured advances in years, in order to
meet the increasing death rate.
THE STOCK EXCHANGE.
CHAPTEE XLII.
DEALING IN SECURITIES.
INCOMES; INVESTMENTS; SPECULATION; GAMBLING IN STOCKS.
From the time when the first company was formed and its
capital represented by shares, which were offered to the public,
or the first responsible government issued its obligations in the
form of bonds or promises to pay, the buying and selling of
such securities may be said to have existed. Dealing in such
forms of wealth is as natural, proper and legitimate as dealing
in dry goods, or any other class of property. From buying and
selling securities for the purpose of investment,
^^^ritlw"*" it was only a step to the period of speculation in
them. When the prospects of large gains made
shares desirable, as in the case of the East India Company, the
South Sea Company or Law's Mississippi Company, the price
rose and speculation was active. When a time of commercial
depression prevailed, or frequent and prolonged wars and inter-
nal strife, unsettled or overturned governments, destroyed com-
merce and made obligations unsafe, trading in securities natur-
ally declined or ceased altogether. But as society advanced, and
governments became more stable, with rights of property secure,
companies began to multiply, and as securities increased, specula-
tion became more common until, like every other employment,
it became the principal or sole trade or occupation of a particular
class of citizens.
In his History of England, Macaulay says: "It was about the
year 1688, that the word ^stock-jobber' was first heard in Lon-
884
LONDON AND PARIS. 386
don. In the short space of four years a crowd of companies,
every one of which confidently held out to subscribers the hope
of immense gain, sprang into existence. Extensive combina-
tions were formed and monstrous fables were circulated for the
purpose of raising or depressing the price of shares." The
London Stock Hiauia for Speculation increased until in 1697 Par-
Exchange liament passed an Act to regulate the business of
speculation in stocks. In 1773 the London Stock
Exchange was organized and now occupies an old-fashioned
building in Capel Court, opposite the Bank of England. It
has a membership of nearly 5,000, with an entrance fee require-
ment of 250 guineas. Its scope is broader than any other ex-
change, since its location at the world's financial center gives it
a pre-eminence. Stocks in companies scattered all over the
world are traded in, American, South African, and Australian
stocks being especially numerous and prominent. It is the inter-
national market for stocks, and bears the same relation to the
world of securities that the Bank of England holds to the finan-
cial world. The Bourse, the great stock market of Paris, was
founded in 1736. Its operations embrace chiefly European
securities. Its agents are not allowed to trade on their own
account.
The great trading center of America is Wall Street, in and
near which are grouped the financial interests which in a large
measure support the New York Stock Exchange. Securities
from all parts of the United States are here listed and dealt in.
There are stock exchanges in Boston, Chicago, St. Louis and
other cities, but they possess chiefiy a local character, being lim-
NewYork ^^^^ almost wholly to the securities in their re-
stock spective localities. Each exchange has its rules
xchange ^^^ methods of doiug business, but in a general
way, they are similar and all are patterned more or less closely
after the New York Stock Exchange. Many brokers in these
cities are also members of the N"ew York Stock Exchange, and
386 THE STOCK EXCHANGE.
through this connection are enabled to execute orders for securi-
ties not listed in their local exchanges. The membership of the
New York Stock Exchange is limited to 1100 and the price of a
membership or "seat" is very high, ranging from $30,000 to
$80,000, depending upon the general condition of the speculative
market.
Widely different opinions prevail regarding the stock ex-
change. It has been condemned as a gambling institution,
which unsettles values and injures legitimate business, and on
Different Views the othcr hand, it has been praised as a necessary
fhTstocL"^ and commendable institution. Both of these
Exchange opinions are, in a measure, right, and both are
partially wrong. As a market for securities the Stock Exchange
is unobjectionable — is a great convenience to both buyers and
sellers. Capitalists who do not wish to loan their money or
invest in real estate may here buy securities which will produce
a desired income, and others desiring to convert securities into
ready money are brought into immediate communication with
buyers through this instrumentality. The Stock Exchange pro-
vides a place for the investment of savings. Not every person
can invest in land or mortgages. These are limited in quantity
and besides are beyond the financial capacity of most of those
with small savings. Corporations are now numerous, and secur-
ities,— both stocks and bonds — are so plentiful that they consti-
tute the chief form of investments. Bonds and stocks of ap-
proved quality have the advantage over real estate
fnves^ment°*^ of being easily hypothecated as collateral for loans,
or converted into cash by sale. The Stock
Exchange, therefore, in so far as it affords facilities for making
legitimate investments, is an undoubted benefit to the business
world, and an aid to the progress and development of the coun-
try. Were stocks and bonds not readily salable, investors would
not buy them, and were this the case, great enterprises such as
railroads, large manufacturing establishments, and the like could
PURCHASE OF INCOMES. 387
not be constructed. In a recent treatise entitled "The Work of
Wall Street/' Mr. Sereno S. Pratt very aptly says:
"A stock market is an income market. It is a place where
incomes are bought and sold. No one, it is true, goes to the
Stock Exchange as he might to an insurance company, and,
paying over the requisite amount of money, buys an annuity.
Yet, essentially, the stock-market operation is the same. The
stocks and bonds traded in on the Stock Exchange would be
worthless unless they represented value, either present or pros-
pective. Bonds and preferred stock generally represent fixed
income. Common stocks represent speculative
Incomer ° iucome, — that is, income that may vary from year
to year, according to the earning capacity of the
corporation issuing them. If a company has no income and no
prospect of earning one, its securities are worth no more than
so much waste paper. It is true that the stocks of an insolvent
company are often quoted in the market, but their value consists
in the control of the charter, the franchise, or some other privi-
lege from which it is believed an income may sometime be de-
rived. Several months ago a list of 48 non-dividend-paying
stocks was published whose average market price was 41, but
every one enjoyed the prospect, immediate or remote, of future
dividends. There could be no stock market if there were no
incomes. In Paris an investor will say to his broker, "Buy me
enough rentes to pay me an income of, say, 50,000 francs a year.'^
He goes into the market to buy, not rentes, but income. In New
York the investor does not express himself so directly. He says
to his broker, "Buy me $500,000 of bonds." Now, what he is
actually buying is not bonds, but the income the bonds will yield.
Before placing the order he has calculated exactly what will be
the income, taking into account the premium paid, the interest
promised, and the duration of the bond. All investments are
thus made on the income basis.
From an investment to a speculation is only a short step. A.
888 THE STOCK EXCHANGE.
buys a share of stock or a bond, pays for it, and lays it aside in
order to derive an income from it. That is an investment. B.
buys a stock or bond and holds it, expecting a rise in its value,
when he may sell it at a profit. That is a speculation. B.'s
transactions are perfectly legal, moral, and in every
Speculation way legitimate. Every dealer in dry goods, gro-
ceries, or farm products, and a large proportion of
those who buy land, buy with the expectation of selling again at
a profit. Then again, one who buys property as an investment
may find its market value so increased within even a very short
time, that he concludes to turn his investment into a speculation,
and sells, intending perhaps to buy another kind of property or
investment. Thus we see by analysis, the operations of the
investor, the merchant and the speculator are essentially the
same in principle, and to condemn one is to condemn all.
Is speculation a benefit to the business world? Would the
business world be benefited if speculation were entirely prohib-
ited and all stock exchanges and produce markets either wiped
out of existence or restricted to purely investment transactions?
Eadical and unthinking persons have declared emphatically an
affirmative to this latter question. They have even introduced
bills into legislative bodies for the abolishment of produce
and stock exchanges. All advanced and progressive nations have
their exchanges in which speculative transactions form a large
part of the business done. By means of the trading, both specu-
lative and for investment purposes, these exchanges act as bal-
ance wheels upon prices. When prices advance,
Is Speculation holders begin to sell, and when prices fall, abnor-
mally low, buyers are attracted, and their pur-
chases tend to raise the market price to its normal condition.
Thus extreme fluctuations are in a measure prevented by specula-
tion.* Then again, the experienced speculator having a prophetic
♦This law is trodden under foot, when in the case of a "corner" a single
individual or a coterie of operators temporarily buy iip and control a particu-
lar commodity and force its price up abnormally.
SPECULATION. 889
vision, may see in the future a season of favorable conditions
which will increase the market value of stocks. Accordingly,
he buys now, thus raising, in a measure, present prices, and in
the future he sells, his sale tending to supply the demand, and
lower prices. His mission then as a speculator has been a benefit
to others. Henry Clews, before a Legislative Committee in New
York, said: ^^Speculation is a method of adjusting differences of
opinion as to future values, whether of products or of stocks. It
regulates production by instantly advancing prices when there
is a scarcity, thereby stimulating production, and by depressing
prices when there is an overproduction.^'
Speculators usually buy on a margin. Instead of paying for
the stock in full, they virtually buy the stock on credit, leave it
in the broker's possession, and pay enough cash on the purchase
to cover any possibility of a loss to the broker. Thus instead of
buying fifty shares of stock at $100 each and paying $5,000 for it
in full, the buyer pays down, say $10 on each share, or 10 per
cent, of the par value as a margin, and is thus able to buy ten
times as much, with a corresponding increase in profit if the
market proves favorable. Since he expects to soon sell the stock,
it is not essential that he should buy wholly for cash. Neverthe-
less, it is an actual sale, and delivery of the stock to him is con-
templated unless he otherwise disposes of it before delivery.
The broker charges interest on the unpaid balance
Buying on Q-f |-j^g purchasc moucy. Were buyers required to
pay in full for all stock purchased, their transac-
tions would be restricted to a comparatively small volume. They
have the same moral right to use the credit system, as the retailer
who buys of the wholesaler and pays part of the purchase price,
the balance, perhaps, to be paid after a portion of the goods have
been sold; or as the buyer of real estate who makes his first pay-
ment and sells the property before the next payment falls due.
It is true the buyer on a margin takes a greater risk than either
of these, for his purchase is larger in proportion to his capital
390 THE STOCK EXCHANGE.
invested, and if the market should go against him, he might lose
his entire investment. But he is a buyer on credit, the only dif-
ference being that a greater degree of credit is extended to him
on account of the custody of the property remaining with the
broker as security.
There is a point, however, where speculation degenerates into
gambling. The feverish desire for sudden riches, and the fas-
cination that attends the uncertainty of speculative operations,
often lead men away from strictly legitimate transactions and
they become reckless, — mere gamblers upon the turn of the mar-
ket. The speculator is one who studies the condition of finance
and trade, both present and future, with especial reference to
their effect upon the stock market, and bases his action upon well
drawn and conservative conclusions, shaping his course so as to
meet conditions of the money market as he antici-
stocks^"^ ^" pates them. He exercises the same judgment and
discrimination that a wholesale merchant or
banker employs in the conduct of his business. The gambler
in stocks, on the contrary, makes no calculations, but "goes it
blind," buying and selling merely on his impulse, and "trusting
to luck" for the result. His operations are not based upon a
study of the future, but upon "tips." He makes no effort to
control or meet future conditions. In short, he does not differ,
so far as the intent is concerned, from one who puts money on a
horse race or a throw of dice. No wonder such operators almost
universally "go broke" sooner or later.
Since the intrinsic value* of any given bond or stock remains
practically unchanged from day to day, or gradually increases in
value according as the company is prosperous or otherwise, why
should the market value fluctuate so rapidly and radically, on
'Change, is a mystery to many persons. Some of the most stable
♦stocks and bonds have three values, viz.: par value, or normal value;
intrinsic value, or real and inherent worth; ancl market value, or what it
will bring when sold. These three values may be widely' diflferent.
FLUCTUATIONS. 391
and reliable stocks in well established companies, paying nearly
uniform dividends from year to year, flucturate in price on the
market, to a surprising extent. Thus St. Paul
fn^M^^u?"'" railroad stock has been known to fluctuate $50 a
the Market
share within a few months, with little or no change
in its real earnings. A stock which earns five per cent, fre-
quently sells for less than one which is earning four. This
seeming inconsistency can only be explained as one of the results
of speculation and the manipulations of the market by shrewd
operators. Mr. S. S. Pratt, in illustrating this feature of the
stock market, says: "A man owns a house from which he derives
a net income of $1,000. The house is worth, say, $20,000, and
the income of $1,000 is 5 per cent, on the investment. But if he
had to sell the house quickly he might not find a ready pur-
chaser, and would have to sacrifice the property, say, for $10,000.
There has been no change in the actual worth of the house. It
is in as good condition as before, and the income continues, but
the price is 50 per cent, of its true value. Or, the owner of the
property may find that a corporation wants it for some important
purpose, and is willing to pay a big price for immediate posses-
sion. In this case an urgent demand has advanced the price,
although there has been no change in income. Let us carry the
illustration further. Suppose the corporation wants the prop-
erty, but wants it cheap, and is willing to wait a while for it.
Thereupon it begins to manipulate the market for real estate in
that vicinity. By various expedients it impresses the owner with
the belief that the prices of property on the street are likely to
decline, and that he had better sell for what he can get now,
than wait and perhaps do worse."
N'ow, transfer the foregoing illustrations to the transactions
on the stock market, and the reasons for many of the fluctuations
in stocks will be apparent. The stock market is filled with
shrewd men who study the present and future conditions of the
market. They know in a general way, who hold certain stocks.
892 THE STOCK EXCHANGE.
and they endeavor to create conditions which will affect the
market in their favor, — enable them to buy cheaply or sell
dearly. If they can create an impression that will depress the
price of a given stock in future it tends to depress it now. Some-
times they sell stocks to create the impression that they are "un-
loading" on account of an expected fall in price, while at the
same time they are buying the same stocks secretly through
another broker, taking care to buy more than they are selling.
Just how far deception in stock manipulation can be carried
without becoming dishonesty is difficult to determine, but open
lying, such as spreading a false or malicious rumor in order to
affect the market is considered disreputable, and beneath any
gentleman both on the stock, as well as produce markets. A
"corner" is the extreme of manipulation, and consists in controll-
ing practically all the stock of a kind, with the result of forcing
those who are short to buy the stock at a fictitious price in order
to fill their contracts.
CHAPTER XLIII.
THE STOCK EXCHANGE. (Continued.)
BROKER; BULLS AND BEARS; LISTING SECURITIES.
The stock broker acts as the middleman in negotiating eon-
tracts between buyer and seller, but in a legal sense is the agent
of only one party to the transaction. Since the trader must rely
very largely upon the advice of his broker, it becomes of first
importance that the broker should be a cool-headed man, whose
judgment concerning all matters relating to the stock market
can be taken as accurate. The broker is supposed
Broker** to keep himsclf thoroughly posted as to passing
events in the financial and commercial world, both
at home and abroad. His view must be a comprehensive one,
and he must be able to recommend a wise course of action for his
client, based upon his mature judgment of the future. The
established brokerage charge is one-eighth of one per cent, upon
the par value of the stock bought or sold, for either buying or
selling, or one-fourth of one per cent, for what is called a "round
trade,^^ consisting in both buying and selling the stock. Some
brokers do a strictly commission business, while others combine
this with trading on their own account.
A "short" is one who has sold stock that he does not own,
but which he hopes to buy, before time for delivery, at a price
below that for which he sold. Since it is now to his advantage
to depress the market in order that he may be able
Bulls and Bears to fill his coutracts at a lowcr price, he is a ''bear"
in the market, and his efforts are devoted to
"bearing" or pounding the price downward. When a "short"
has been able to buy enough stock to fill his contracts he is said
894 THE STOCK EXCHANGE.
to have "covered." If he finds himself unable to cover except
at a loss, he may "liquidate/' which consists in paying the dif-
ference to the other party. A "long" is exactly the opposite of
a short, — one who has bought more stock than he had contracted
to sell, and is therefore anxious that the market should advance,
in order that he may dispose of his holdings at a profit. He
is, therefore, interested in tossing the price upward by every
means within his power, and hence is called a "bull." A "bull
market" is one in which prices are advancing. A "bear" market
is one in which prices are declining.
A "put" is the right which a broker has by contract to
deliver to another a specified amount of a stock at an agreed
price within a specified time. If the market declines, the broker
p^^g who has a "put" may buy the stock and deliver it
Calls at a higher price, realizing the difference as a
^P"""^^ profit. A "call" is the right to demand, or call for
a specified amount of stock at an agreed price, within a fixed
time. The owner of a "call" is a bull. It is to his advantage to
have the price advance, for then he may call his stock and sell
it at an advance. A "spread" is a combination of a put and a call.
The holder of a spread has the privilege of delivering the stock
at one price or calling it at another. For the privilege of a put,
call or spread, a fee is paid by the broker who buys it, varying in
amount, according to the value of the privilege as estimated
according to the condition and probabilities of the market.
Numerous terms in addition to those already mentioned have
been coined especially for the stock market. A "point" is one
per cent, in the price of a stock or bond. The market is "steady"
Language whcu it holds its owu, "firm" when it advances,
of the stock and "weak" when it declines. A "pool" is a com-
bination of operators acting together for a com-
mon end. A "blind pool" is one in which all the operators are
kept in ignorance of its operations except the one person who
manages it. The object to be attained is absolute secrecy. A
LISTING SECURITIES. 395
"wash sale" is a fictitious transaction made by two or more mem-
bers who act in collusion merely for the purpose of giving the
appearance of a rise or fall in the price of a certain stock, or
swelling the volume of its apparent sales and thus influencing
others to buy or sell.
Listing securities consists in placing them upon the records
of the stock exchange so that they may be traded in by members.
Securities not thus recognized or listed cannot be the object of
transactions upon the floor of the exchange. Listing stocks or
bonds does not make the exchange a guarantor of their value,
but is an evidence of their genuineness. Buyers
Securities must judgc f or thcmselvcs the value of the securi-
ties which they purchase. By the operation of
listing, however, the securities are required to pass an investiga-
tion which in a measure establishes their character as reliable,
and thus to a certain extent protects the buyer. A corporation
desiring to have its stock or bonds listed, must file a written
statement with the Listing Committee of the Stock Exchange,
setting forth the fullest details concerning the company and its
securities, — its name, date and place of organization, authorized
capital, amount of stock, preferred and common, amount actu-
ally paid in on the stock, amount of liability of stock holders,
name and address of the Eegistrar, description of the assets of
the company, detailed statement of the nature of the company's
liabilities, gross and net earnings for the past year if the com-
pany has been in business that long, or a copy of the company's
balance sheet for the previous year, also a description of the
bonded indebtedness outstanding of the company, if any, names
and addresses of the officers and directors, etc. Thus a full his-
tory of the past, and a description of the present condition of the
company is placed on record with the Stock Exchange Commit-
tee, who, after due consideration, vote to refuse or admit the
securities to the privilege of the Stock Exchange. With these
safeguards thrown around the market, together with the re-
896 THE STOCK EXCHANGE.
quirements usually added by the listing committee that a Trust
Company shall act as trustee of the mortgage and registrar of
the bonds, if bonds are to be floated, investors may deal in securi-
ties with a large degree of confidence and safety. Banks will
accept listed securities as collateral more readily than others.
No one but members are allowed upon the floor of the ex-
change. All buying and selling, or agreements to buy and sell
are made by oral contracts. The member making the offer
specifies the number of shares, the fractional part of the price,
(such as f in case the quototion is 103f ) and the terms of the
Buying and ^^^^- ^^^u no amouut of stock is named in an
Selling offer 100 shares of the par value of $100 each is
ecunties understood. The terms of the sale are either
^^cash," that is for delivery and payment upon the day of sale,
"regular" that is, delivery and payment upon the next business
day following the sale; "at three days,'^ which is for delivery and
payment upon the third day following the sale, or for "buyers
option" or "sellers option," which is after three days and within
60 days after the date of making the contract, at the option of
the party holding the privilege or option. Under this form of
contract the buyer, or seller as the case may be, has the right
to call for the consummation of the transaction at any time he
chooses within the limit of sixty days.
Immediately after a transaction has been made between two
members upon the floor of the exchange each is supposed to Jot
down a synopsis of it upon a small pad, which he carries for
the purpose. From this imperfect record the entries are carried
upon the books of the members and afterwards compared. It
is very seldom that a member disputes his liability under the pad
entry. If the stock is not delivered as per agreement, or not
paid for upon delivery offered, the matter is reported to the
proper officer of the exchange, who buys or sells the stock at the
market price, in other words endeavors to carry out the agree-
ment of the member who is in default, and whatever loss is
MARGINS. 897
entailed thereby, or whatever the difference between the agreed
price and the market price, the one party has a claim against the
other for its recovery. Stocks sold "ex-dividend" do not carry
the dividend to the purchaser. When the books of a corporation
are closed and a dividend declared, the dividend no longer goes
with the stock, but just prior to the declaration of another divi-
dend, that dividend does go with the stock unless it is again sold
ex-dividend.
As previously stated, with the exception of purchases made
for the purposes of investment, the bulk of the business of
buying and selling stocks and bonds is done upon margins. The
buyer does not pay for the securities in full, but buys them
largely upon credit, paying probably ten or twenty
Margins per ccut. of their value to the broker as a margin
to cover any possible adverse movement of the
market. The broker furnishes the capital necessary to purchase
the securities and charges his customer interest upon their cost,
over and above the amount of the margin in his hands. Thus,
suppose A. desires to buy stocks worth $100,000. He deposits
$10,000 with his broker, together with instructions to buy the
specified stock. The broker is merely the agent of the cus-
tomer and must carry out his instructions. The broker may
advise his customer as to the best course to pursue, and his
advice is usually valuable, since it is founded upon intimate
association with the stock market, but the customer issues the
actual orders to buy or sell. The broker protects himself from
loss through fluctuations in the market by requiring a sufficient
margin to be deposited. The amount of the margin will vary
according to the character of the stock. While ten per cent,
is ample margin in the case of most stocks, a larger margin may
be necessary in some cases, and of this the broker is the judge.
In case the market fluctuates to the limit of the margin, the
broker calls upon the customer for more margins. If the cus-
tomer fails to respond, the broker sells the stock immediately in
order to save himself from loss by a still further fluctuation.
399 THE STOCK EXCHANGE.
Stocks or other securities purchased by a broker for his cus-
tomer must be paid for on delivery. But the customer has
placed only a margin of perhaps 10 per cent, of the cost of the
securities in the broker's hands. The remainder of the purchase
money the broker must, and does, furnish. Suppose a broker
buys 1,000 shares of stock at 120, the whole amounting to $120,-
000. The customer has deposited $12,000 as mar-
tJn of Checks* 8^^' '^^^ broker must furnish the remaining
$108,000. Brokers are not rich men, and even if.
they were, they could not possibly furnish sufficient capital to
buy all of the securities which a large brokerage business would
require. The broker arranges with his bank for a loan large
enough to supply the needed funds, the securities about to be
purchased to be deposited as collateral. He extends credit to his
customer and in turn gets credit from his bank. He extends a
credit to his customer equal to, say 90 per cent, of the cost of
the stock, and the bank extends a credit to him of, say 80 per
cent, of the cost of the stock. Thus, the customer furnishes
$12,000 of the purchase price, the broker furnishes $12,000 of
his own capital, and the bank furnishes the remainder, $96,000.
But the securities are not yet delivered to the buyer, and the
condition of their delivery is the simultaneous payment of the
money. The matter is arranged in this way: The broker has
an understanding with his banker that the bank will over-certify
his check temporarily. After certification the check is passed
over in exchange for the stock, which is then sent to the bank
as collateral for a loan large enough to make the account good.
It is true, however, that banks will not over-certify checks in
this way unless the character and standing of the broker are
such as to warrant implicit confidence in him. The broker must
also carry a constant balance in the bank large enough to entitle
him to such favors.
It will thus be seen that over-certification of checks is an
absolute necessity in stock transactions under the custom of buy-
OVER-CERTIFICATION OF CHECKS. 899
ing securities on credit or under the system of margins. A
clause in the National Bank Act forbids the over-certification of
checks by National banks, and on account of this restriction
(and others) Trust Companies and private banks have been or-
ganized in considerable numbers to meet the public needs.
Call loans are a feature of stock trading, and are extensively
made from day to day, subject to "sharp call," which means that
upon notification from the bank, to the borrower, such loans
shall be repaid before the close of banking hours of the same
business day. These loans are secured by stock
Call Loans Collateral, and when stock loans are terminated by
such notification the debtor is very likely com-
pelled to borrow other money in the open market, (which tends
to advance the rate of interest on loans upon that particular
security) or to sell such securities in the open market, which is
apt to depress its market price, especially if it should become
known to have been discredited as collateral by the trust com-
panies.
In hundreds of offices in Chicago and other cities throughout
the country may be seen little telegraphic instruments called
"tickers," through which runs a narrow paper ribbon on which
the instrument prints automatically the names
Tickers and priccs of stocks and bonds in abbreviated
forms. These tickers, together with the service
which they furnish, are rented to offices by the Western Union
Telegraph Company, and as fast as sales are made on the New
York Stock Exchange the telegraph conveys the information to
the public by means of these instruments.*
*The same device Is used for the produce exchanges.
THE PRODUCE EXCHANGE
CHAPTER XLIV.
BOARD OF TRADE.
CHARACTER; ORGANIZATION; MEMBERS; BENEFITS TO PUBLIC.
The United States has never, thus far, been a great manu-
facturing country. Its commerce and wealth are chiefly based
upon the products of the soil. Its mining and lumbering in-
terests have been small compared to its agriculture. It is the
great food producing nation of the world. Eu-
i^ur^^e'ltl"'^** rope is directly interested in the success of agri-
culture in the United States and is dependent
largely upon American produce. The development of agri-
cultural interests has been a potent factor in the growth and
development of our cities. New Orleans became the greatest
city of the south chiefly because the products of the cotton
fields found their natural outlet there. Chicago had its growth
in the fact that it is the center of a vast agricultural domain.
Buffalo and other cities of the lower lakes assumed importance
as the transportation of farm products by water to New England
and the seaboard became a necessity. Later, Galveston in the far
southwest, Minneapolis and Duluth in the northwest sprang up
and became thriving cities because they were natural geograph-
ical outlets for agricultural products of the expanding and
developing west. Agriculture has also been the moving in-
centive to the building of railway and steamship lines. It
was to meet cargoes from the Illinois and Iowa prairies that
the first railroad lines were pushed westward to the struggling
400
BOARD OF TRADE. 401
trading center at the foot of Lake Michigan, — afterwards to
become the greatest grain market in the world.
The produce exchange is an outgrowth of our agricultural
development. It is a carefully devised business system for
handling, storing, and distributing annually millions of bushels
of grain and millions of dollars worth of animal products in the
form of meats, lard, etc., at important points
Definition in the United States. It is a grain and produce
market, the creature of our necessities as an agri-
cultural and commercial people. It differs from a stock ex-
change in that its members deal in realities, even though they
handle nothing but warehouse receipts or promises to deliver,
while the stock broker deals in the evidences of credit, or securi-
ties which may or may not have a tangible value back of them.
Produce exchanges are usually located in those cities which
have important agricultural sections, tributary to them, where
railroads center or where rail and water commerce have natural
connections at a navigable port. The most im-
Location portant produce exchanges are therefore at the
seaboard, on the lakes or on navigable rivers. On
the Atlantic coast the exchanges are at Boston, New York,
Philadelphia and Baltimore. On the Gulf of Mexico the princi^
pal exchange points are New Orleans and Galveston, and on the
great lakes are Chicago, Milwaukee, Duluth, Detroit, Toledo
and Buffalo. St. Louis, Kansas City, Cincinnati and Minneapo-
lis are examples of exchanges in close touch with producing
regions but not having advantages of lake or ocean navigation.
San Francisco is the most representative exchange point on the
Pacific coast. These cities furnish the natural outlet for the
distribution of the products of their several sections.
Each exchange is a corporation controlled by a general or
special charter under which its acts are legalized by the state
in which it is located. It must be governed by certain officials
elected from and by its members. These officials are usually a
403 PRODUCE EXCHANCE.
presiaent, one or more vice-presidents, a body of directors and
various standing committees to attend to the details of official
business. Each exchange adopts for itself rules and
the^Exchlnge" bj-laws which govcm both officials and members
in all their acts. These rules prescribe the
requirements of membership, the terms and conditions under
which a member may transact business, and provide rigid
methods of discipline for violations of the laws of the exchange.
It must be kept in mind that the exchange, as such, transacts
no business — of a commercial nature, — does not receive or ship,
buy or sell during its existence a bushel of grain or a pound of
produce of any kind. It simply furnishes the facilities for
trading to its members and so hedges them about with restric-
tions that every contract made is binding under its rules and
under the laws of the state and nation. Any digression from
the strict letter of exchange law is promptly followed by a
charge of uncommercial conduct and this by suspension, ex-
pulsion or other penalty.
The members of an exchange may be divided into several
classes according to the special features of the business adopted.
"Receivers" are those who make a business of receiving grain
or other produce direct from the country shipper. Their busi-
ness is to carry out the instructions of the ship-
their^rivfieges P®'' either in storing the grain in a warehouse or
offering it for sale in the open market to the
elevator owners who may wish to carry it to a future time, to
the miller who may want wheat to grind, to the distiller, the
brewer, the cereal company or perhaps the eastern shipper or
exporter. "Shippers" are those who make it their business
to arrange for the forwarding of grain to still other exchange
points or to eastern distributers and consumers. "Carriers"
give special attention 'to financing this class of property by
supplying the necessary capital, furnishing storage, insurance
and all needed protection until there is a demand for its ship-
MEMBERS' PRIVILEGES. 408
ment. This class of business has. given rise to extensive sys-
tems of private elevators. Public warehousemen are those who
own or lease from railroads great storage houses the contents
of which they generally do not own. They are required to issue
warehouse receipts for all grain stored in such houses and the
state, through a board of warehouse commissioners, regulates
the storing, carrying and delivery of this grain to its owners
who pay a fixed charge per bushel to the warehousemen for the
warehouse service.
In the workings of the Produce Exchange no class of mem-
bers occupy so prominent a place as Commission Merchants. As
a rule they outnumber the grain receivers, the shippers, the ele-
vator owners and the independent traders, who are without a
commission business. Ordinarily the best class of commission
merchants do not trade on their own account, but confine them-
selves to the proper execution of customers' orders. For the
handling of a trade in grain there is established
sionMeTc^ant ^y ^^^^ cxchaugc a regular commission charge,
usually Jc a bushel for opening and closing the
trade. The business is most profitable, when conducted on a
large scale, the largest houses in the largest markets of the
country frequently executing orders for many millions of bush-
els of wheat, corn and oats in a day. This presupposes a very
extensive office force, a big private wire system reaching to
other exchange points and a wide acquaintance backed by a most
excellent reputation for handling all orders instantly and accu-
rately. Where a few houses of this kind exist in a large trading
center there are hundreds of smaller concerns doing a limited
business, but under the same rules and restrictions of the
exchange. The first province of the commission man is to exe-
cute orders in any or all markets on the exchange. He must
know his customers, or the people who entrust him with orders.
If he has not a personal acquaintance with his principal, (the
man giving or sending the order,) he must have what is the
404 PRODUCE EXCHANGE.
equivalent of personal acquaintance and confidence — a financial
guarantee from the principal. , ^
This brings up the subject of margins or security on trades
ordered. The favored commission house may have a number of
customers whose financial prominence is such that they have
carte blanche privileges at the order window. In such cases the
commission merchant knows that whatever is bought or sold for
such account is as "good as gold" without the scratch of a pen.
This class of customers is the exception. For the ordinary
trader the first step is to be properly presented to the head of the
commission house as a reputable gentleman. The
Margins secoud rcquisitc is for him to deposit with the
house such sum of money or certified checks as
will cover ordinary obligations in the trade. Then his orders to
buy or sell are carried out by the machinery of the fully equipped
commission house. If his orders exceed in volume the credit he
has with the house, the credit clerk is quick to notify him that
more funds are needed. The rules of most exchanges permit
the commission merchant, if any unusual action is taking place
in the market, to call margins on trades to the extent of ten per
cent, of the ruling value or price of the article bought or sold.
As an example: The customer has wheat bought at 80 cents for
a future month. Ten per cent, of this price is 8 cents. The
commission man if he fears a bad break in the market may ask
the trader to put up enough funds to protect the trade on a
break of 8 cents or down to 72 cents. If the wheat is sold at
80 cents and the market looks so strong that it may make a big
advance, the margin is called the other way, — the trader putting
up the funds to protect the house on a possible upturn in price
to 88 cents. When the market has covered half this ground a
break of 75 cents or an advance to 84 cents, the commission man
may again call for margins to the full limit above or below the
ruling price. Thus, on a very excited market or during panicky
conditions, marq-in calls on customers mav come thick and fast.
MARGINS. 406
The customer may feel that he can not or will not risk more
money on his open trades and orders them closed at a loss. If
customers do not respond to margin calls the house with the
open lines on its book, may close the same for account of those
whose margins are about exhausted.
These are extreme cases. The ten per cent, margin call is
unusual. In the ordinary condition of trade from 2 cents to 5
cents a bushel protection is considered sufficient by the commis-
sion merchant. Naturally there are times when the customer
can not be reached quickly or for some reason can not respond
quickly enough and the commission house is caught in the gap
between the wicked market and the tardy principal.
Many students of business methods are apt to conclude that
all transactions on an exchange are surrounded by some unex-
plainable mystery. They readily understand that conditions
such as drought, frost, excessive rain, etc., affect the year's
output of produce, and the whole problem of
Trade News °° grain speculation is made up of factors as plain
and simple. The speculator watches the crops of
the world the year through. If the winter crops go into the
ground in good shape it is the first promise of abundance for
the coming year. If spring crops are seeded favorably and a
large corn acreage is planted the probability of abundance in-
creases. Everything else left out of the question, this farm
prosperity starts the speculator selling months ahead. If the
opposite is true — adverse seeding seasons, winter killing of wheat
and wet weather delay in corn planting — the speculator begins
buying on the theory of short supplies and naturally higher
prices. Extend this system of observation so that it covers
the importing countries of Europe — chiefly England, France
and Germany — and the competitors of America in exporting
supplies to Europe — chiefly Russia, Danubian countries, India,
Australia and Argentina — and you will find the commercial
reason for ninety per cent, of the trading done on future con-
406 PRODUCE EXCHANGE.
tracts. If importing and exporting lands are promised short
crops then very high prices for twelve months ahead are almost
certain. If both importing and exporting countries have an
over abundance promised, prices are likely to be depressed.
The speculator also takes into account the reserves on hand from
the previous year. This is important whether these reserve
stocks are at home or abroad. Weather conditions are watched
every day of the year. Great crop promise may be changed in
a night by a hard untimely frost, by hot winds, by excessive
rains at harvest or by a widespread drought during the growing
period. The perfection of the signal service and the weekly
and monthly weather and crop reports furnished all exchanges
by the agricultural department at Washington have become more
and more an aid to the trade in shaping prices according to
natural conditions.
In a general way the Produce Exchange is a benefit to both
producer and consumer. The first great benefit is in the ac-
curacy with which the organized trade gathers and makes public
valuable information about production the world
Benefits of the T) xi, j j
Exchanges oYeT. Both producer and consumer can more in-
telligently prepare for the future — the one by sell-
ing quickly or holding on to his year's production as the con-
ditions suggest, the other by making his contracts early for
supplies or by holding off for lower prices as his judgment
might direct. In the event of poor production at home the
speculator is the best friend of the farmer. Long before the
grain approaches harvest and perhaps months before the great
American corn yield is to be gathered, the traders who watch
every feature of crop development have advanced prices to a
high level and the man who owns the acres is the first to feel
the benefits. He may have less bushels to market but his
crop loss is to a large extent made good by the markets made
possible only by the Produce Exchange as here outlined.
CHAPTEK XLV.
THE PRODUCE EXCHANGE— Continued.
CASH GRAIN; FUTURES; INSPECTION; BUCKET SHOPS.
Although about ninety per cent, of the contracts made on
any exchange are in "futures" there must always be the very im-
portant basis of cash business. Without the actual property
the contracts for future delivery would mean nothing and would
have no standing in law. The main fea-
Tradin"^**" turcs of cash trading will therefore be con-
sidered first. A good portion of the trad-
ing hall is generally given to what are termed cash grain sample
tables. The grain house with a certain number of cars of
wheat, corn, oats, rye, barley or flax seed on the railroad tracks
for its disposal hastens to have samples of the same displayed
on these tables. The samples are in small paper sacks, the
contents of which have been taken from the cars when they
were inspected on arrival. Each sack contains the name of the
railroad line over which it was received, number of the car, the
grade affixed by the official inspector, etc. When the samples
are placed on the tables the grain is on the market. Around
these sample tables gather the receivers who have grain to sell
and buyers of all classes who wish to secure a share of the current
receipts from the country. As suggested before, these buyers
may include: First, elevator owners who want the grain to
fill their houses for the profits in the storage; second, the millers
or their agents buying wheat to grind; third, brewers and dis-
tillers who wish corn or barley for manufacturing purposes;
fourth, the agent of the cereal company who wants oats for his
plant; fifth, the shippers who have need of grain of all kinds to
fill contracts made with eastern distributers, with actual con-
407
408 PRODUCE EXCHANGE.
sumers or with export interests contracting for supplies needed
abroad.
When the seller and buyer agree on a price for a single car
of grain or for fifty cars, as the case may be, the sample bag
passes to the buyer. He can then direct the railroad having
the cars on its tracks how to dispose of them. They may be
ordered to a certain warehouse or mill or other
to e'uylr ^^^^^^ plant to be unloaded or they may be ordered
switched to the tracks of some other road to be
forwarded to the point for which the grain was purchased.
These transactions repeated on each trading day of the year
constitute the chief feature of the cash grain trade.
Another important feature in the cash grain business is the
delivery of grain in either private or public warehouses. Sales
may be effected from private houses by samples or from public
warehouses by the tender of the official receipt or certificate
representing the grain when it went int© storage. Usually sales
made from storage houses are for larger amounts — possibly only
25,000 bu., if some special lot of grain is desired — ^but more
frequently 50,000, 100,000 or 250,000 bushels where the grain
is to be moved out by rail or water in large quantities. In all
these transactions the bill of lading, the certificate of the public
weighmaster, and the official inspection certificate pass with the
grain to the buyer who gives in exchange his check in full pay-
ment. This closes the cash grain transaction.
That part of the business of the Produce Exchange which re-
ceives most notice by the press and the public is known as
"trading in futures'^ or speculation. Unreasonable critics of the
system go so far as to call this feature of the business gambling.
This phase of criticism was discussed in a previous chapter on
the Stock Exchange, which furnishes a parallel case.
Each member of a Produce Exchange can do business on his
own account or he may execute orders for others inside or out-
side the association. If he. operates for others he does so on a
CASH GRAIN. 409
commission prescribed by the rules. He must in making a re-
port of his trades to his principal state in certain written form
with whom he made the trade in the open market,
Futures*" *^® ^^^® ^^ which it was made and the price.
If a member acting as a broker for a fellow
member or as a commission merchant for an outsider makes
ten or twenty or two hundred trades in a day the same exacting
conditions attach to each separate transaction. It is the growth
of such business that builds up, first the small commission firm
and possibly, later, the great grain and banking house with
private wires stretching out to other exchange points and pene-
trating into the states tributary to the home exchange.
The trader who sees in existing conditions on a certain day
reasons for higher prices and operates with a view of advancing
the market is called "a bull." The trader who does the oppo-
site is called a "bear." The entire trading body as well as the
public, so far as it takes any part in the making of the market,
is thus divided into bulls and bears as on a stock or
Bulls and Bears cotton exchange. If a man with money to in-
vest or risk in a business transaction buys a vacant
lot in a suburb and sells it a month or a year later at a certain
advance or a certain loss he has engaged in what the trade and
the public call speculation.
It is a simple matter to apply the same attempt at profit
making to the products of the soil. The grain trader goes into
the open market where he meets hundreds of others and makes
trades — makes contracts for future delivery — under the fixed
rules of the exchange — in grain. He buys in midwinter or
early spring on May contracts or in the summer or fall on
September or December contracts. While he is
its Details " '" doiug this auothcr member has made a sale of a
certain quantity of a specified kind of grain to be
delivered in May, July, September or any other month. Long
before the month named arrives, the man who had the grain
410 PRODUCE EXCHANGE.
bought — finding himself with a profit of several cents, goes into
the same open market and sells out a like amount. The mem-
ber who sold originally finds the market several cents against
him. He goes into the market and buys a like amount. The
one draws down profits from the clearing house. The other
puts his check into the clearing house to make good his losses.
Both are even on the market. Both have engaged in speculation
in its simplest form.
Assume that the original trades stood on the books without
any offsetting transactions until "delivery day," the last day of
the month named in the contracts. Then at that date, under
the rules, the buyer must be in a position to take the 5,000,
10,000 or 50,000 bushels named in the contract and pay for them.
He then has to deal with cash property and he
Delivery Day has tumcd over to him warehouse certificates call-
ing for the actual property for which he must
draw his check in settlement. The original seller, on the other
hand, may tender the amount of grain named on "delivery day"
or he can deliver the same at fixed hours on any trading day of
the month named in the contract.
The member or house which for his own account or on
orders from a principal continues to buy certain cereal for
some future month on a large scale for weeks or months in ad-
vance becomes a factor in the market to the extent perhaps of
causing a marked upturn in the price. Those who have thus
bought are termed in the principal "longs" or holders in that
particular cereal on that exchange. Those who have sold to
this large buyer or to others, day after day are termed ^^shorts."
These latter may find the market going too much
shofts^"** against them and through fear of heavy losses
may switch suddenly to the buying side for pro-
tection. This is called "covering," a performance which often
adds great force to the buying side and results in a sharp ad-
vance in the price for the time being. On such a swell in the
LONGS AND SHORTS. 411
price the large holders may reduce their lines at good profits
or may continue to buy up to delivery day when they can demand
the actual property. This condition may be reversed. The
holder may find the market each day going against him. The
sellers may grow bold, pressing the market lower until the longs
are forced to abandon their position. If they sell out to prevent
further losses it is called forced liquidation — ^just the opposite
of covering by shorts. The short sellers, with a decided ad-
vantage in the market because of the decline, may buy back
to offset previous sales or may continue short until delivery
day when they are obliged under the rules to produce the
property sold — having the entire month to make the delivery.
This kind of trading gives rise to all the turns in prices in a
speculative market. ^Yhen carried to extremes it gives rise
to violent fluctuations in prices by which smaller or more con-
servative traders are greatly inconvenienced and often finan-
cially injured.
Following up the foregoing methods of trading a "corner"
develops under certain conditions. A strong house or a group
of leaders in the trade may decide that the wheat, corn or oats
market is in a condition to be easily controlled and the price
manipulated. The shipping demand for a certain cereal has
reduced stocks. The country roads are bad or farmers too
busy to market grain freely. Perhaps some injury threatens
the growing crop and makes the country unwilling to part with
reserves. If the warehouses contain but 2,000,000 bushels of
the grade required to fill contracts and the man who contem-
plates running a corner sees that another ^,000,000 bushels is
all the country tributary to the market is likely
Corner to fumish, evcu with the inducement of high
prices, then his plan is to keep on buying until
he has accumulated a line of about 10,000,000 bushels. Of this
amount the sellers of 4,000,000 bushels will have the actual
grain from the country and from the elevators to deliver when
412 PRODUCE EXCHANGE.
the month for which it is sold arrives. The sellers of the other
6,000,000 bushels are caught "short." They have sold what
they can by no means deliver. If these shorts take alarm and
rush into the open market to buy or "cover" for protection then
the excitement begins. Prices may be advanced several cents
in a single day. After prices are thus carried far above a
natural level others of the short sellers may seek to make private
settlements on large lines outside of the regular trading channels.
There is a third and last resort for those who sell and can not
deliver. They can default on their contracts and ask an arbitra-
tion committee to fix a fair settlement price. It should be
stated here that the laws of many states make the running of
such a corner illegal. On nearly all exchanges, also, there is legis-
lation against such operations. As a rule the man conducting a
deal of this kind is fortunate to escape losses in the end as he
has delivered to him such a volume of high priced grain that he
may not be able to distribute and market it until the expense of
storing, insuring and carrying the grain will offset the profits
he may have secured in his settlement with the short sellers.
One of the most important features of the exchange, under-
lying both the cash grain trade and the transactions in futures
is the matter of grain inspection. After the grain leaves the
farm and is thrown upon the open market at an exchange
point it becomes an element in the commerce of the world.
Banks make loans on grain in transit and in store.
, ^^^^ ,. It must carry insurance in most of its travels
Inspection
from producer to consumer. Somebody must
vouch for it. The man who goes around the world needs
personal words of introduction and letters of credit. Grain — the
chief product of American farms — must start on its way in the
world of trade with a certificate to show its quality. Grain
inspection is conducted not by the exchange but by the state
in which the exchange is located. Thus, Missouri regulates
inspection for St. Louis, Minnesota for Minneapolis and Illinois
GRAIN INSPECTION. 413
for Chicago. The governor of the state appoints a Chief
Grain Inspector. This same official aided by a board of Rail-
road and Warehouse Commissioners appoints a Supervising In-
spector and as many assistants as the size of the railroad center
and the volume of grain handled suggest. These assistants
visit the railroad yards daily and by extracting samples from the
interior of the cars of grain fix upon its proper grade. These
grades usually range from No. 1 to No. 4 and below this it is
classed as no grade or rejected. It is with the higher grade
the greatest care is needed. Most exchanges specify that con-
tracts may be filled with No. 1 or No. 2 grain. If the state does
its work well other exchanges and grain merchants the world
over learn to accept its certificate of inspection without ques-
tion. The state not only inspects grain as it is received, and
before the samples are offered on the exchange, but it places in-
spectors at warehouses to certify to quality of cargoes withdrawn
from store for shipment by boat or rail to their destination. Mil-
lions of bushels of grain are sold every month in the year to
European buyers who rely on the grade given the grain at the
American exchange point by the state inspectors.
At times when sellers are making heroic efforts to rush grain
to market to fill large contracts it is often of the greatest im-
portance to have the receipts gradfe No. 2 instead of No. 3. The
one certificate will make it deliverable on a con-
Grade^"** tract made on the exchange, the other will not.
Growing out of this emergency, in attempting to
make grain good on contracts, there has grown up at each ex-
change point. a system of private elevators equipped with ma-
chinery for cleaning and drying grain to raise its grade. It is then
passed to a public elevator, is again inspected and may be deliv-
ered on contracts. What is known as "kiln dried" corn is very
desirable in commercial circles at certain months in the year —
especially the germinating season — when corn containing
moisture cannot be shipped long distances without heating or
sprouting.
414 PRODUCE EXCHANGE.
Before concluding this discussion of the Produce Exchange
it may be proper to refer to a species of gambling conducted
under the semblance of grain trading, and known as the oper-
ation of "bucket shops."
The bucket shop is an imitation of the commission house.
The one is an outlaw in most states in this country, the other
as legitimate as filling of orders for coal, lumber or merchandise.
The commission house fills orders entrusted to it in the open
market, where every purchase or sale has its effect in making the
prices, on which producers sell their crops and consumers both,
domestic and foreign base their purchases. Every sale contem-
plates delivery and every purchase contemplates the ability of
the buyer to take the actual property on delivery
Bucket Shops day. Bucket shops generally secure their quota-
tions, (which they mark up on a black-board,)
from the exchange by trickery. They never create a quotation,
except it be a false one to get the best of an innocent customer.
The bucket shop system is to take the wagers of its victims on
the next turn in the regular market, the money passing over the
desk as if betting on a horse race. Most trades are made on 1
cent a bushel margin and the bucket shop deducts its |c or Jc
a bushel from the price when the outsider makes his bet. It is
a gamble pure and simple on what the market is about to do.
No bucket shop ever controls a bushel of grain, ever makes a
delivery or fills an order in the open market unless for protectiou.
Nearly all the highest state courts and the United States Su-
preme Court have ruled in test cases that regular exchange
methods are proper commercial transactions while the bucket
shop is declared an evil.
STORAGE AND WAREHOUSING.
CHAPTER XLVI.
BONDED, PRIVATE AND COLD STORAGE WAREHOUSES.
IMPORTATION OP GOODS; CLASSES OF BONDED WAREHOUSES;
RESTRICTIONS; COLD STORAGE SYSTEM.
It is frequently not convenient for an importer to pay the
duty upon an invoice of foreign goods immediately upon their
arrival. He may have imported the goods to meet a demand
several months later. He imports the goods when he can get
them or when he can buy them to advantage, and holds them
until the demand for them arises. Many foreign
warlhouses articles, such as the laces of Switzerland or the
rugs of Persia are made in the cottages or homes
of the people. These are bought up by middlemen who go about
collecting them, brought down to the seaport and there disposed
of to American buyers who purchase for our market. Such
purchases must be shipped to America at once. Even in coun-
tries where the factory system prevails it is often necessary for
our merchants to place their orders far in advance of the demand.
This of necessity requires large capital, and as the duty is a con-
siderable item, it is a great convenience to merchants to be able
to leave the goods in the hands of the Government without pay-
ment of the duty until they are needed for sale.
A bonded warehouse is one designed especially for the stor-
age of imported goods awaiting payment of the duty by the
importer. Such warehouses are frequently owned by private in-
dividuals, but are constructed under the supervision of the Gov-
415
41« STORAGE AND WAREHOUSING.
eminent and are fire-proof. They are under the absolute control
of the Government and are isolated from other buildings. A
Government officer known as storekeeper is in charge of each
warehouse. He is held responsible for the records
Storekeeper and safc-keepiug of the contents. No goods can be
delivered from the warehouse without a written
permit from the Collector of the port, which must be presented
to the store-keeper. He checks all goods into the warehouse,
and when a permit for delivery is presented, he checks out the
goods needed by the importer. Goods may be left in a bonded
warehouse three years without payment of duty.
Bonded warehouses are, for convenience, divided into several
classes. Class 1 consists of warehouses owned or leased by the
Government and are known as General Order Stores. This class
is the receptacle for all unclaimed, abandoned or seized merchan-
dise, the owners of which have not complied with the law. Class
2 is for the special and exclusive use of the firm or corporation
owning it. It is usually located near the business
Classes housc of the firm, and contains no goods except
theirs. It is in charge of a government store-
keeper and subject to the same restrictions as other warehouses.
Its entrances and exits are separated and its keys are held by the
store-keeper who checks the receipt and delivery of goods. Class
3 is for the general storage of goods in bond. Any importer can
store his goods in Class 3 warehouse.
When the goods are landed at a port of entry the merchant
to whom they are consigned gets notice of their arrival, and if
he does not desire them for immediate consumption he enters the
goods for the bonded warehouse, or if they are in a warehouse at
some port, he enters them for re-warehousing, gets a permit to
transport them to the warehouse near to his busi-
Goodr°* ^^^^ home, and without paying duty transports
them to his home port and places them in a bonded
warehouse, almost as convenient to him as his own store, and
MANUFACTURING BONDED WAREHOUSES. 417
there he may allow them to remain until his customers call for
them. When the goods are received at the bonded warehouse
the storekeeper inspects the condition of the packages, opens an
account with that merchant and enters the number of the bond
on his book with the number of cases and marks on the same, to
await the pleasure or wants of the owner.
A merchant may withdraw a portion of an importation by
paying the duties upon the goods covered by that consular in-
voice. Usually merchants have their foreign or-
rportion^** ° ^^^^ made up into convenient consular invoice
quantities, so that in case it is desired to withdraw
a special class of goods, it is not necessary to pay the duties on a
large quantity of other goods. All goods not withdrawn from the
bonded warehouse in the three years, are considered abandoned,
and are sold at public sale.
An American manufacturer may bond his factory to the Gov-
ernment* so that it will be possible for him to import raw mater-
Manufacturing ^^^^' manufacture them into a finished product, and
Bonded ship this to a foreign country without the payment
are ouses ^£ ^^^ ^^^^^ upon the raw material. His factory
would then be called a manufacturing bonded warehouse, and
would be subject to the same regulations as other bonded ware-
houses.t
PRIVATE WAREHOUSES.
Ordinary warehouses are denominated free, or private, to
distinguish them from bonded warehouses. The Government
has no control over them. They are for general storage pur-
poses, or for that of imported goods on which the duties have
been paid. Manufacturers frequently have occasion to store up
*He may furnish the Government with a bond as security, and submit to
the regulations.
fA manufacturer may pay the duty on raw material imported, mann-
facture it into a finished product, ship this to a foreign marljet and receive a
refund of the duty paid on the raw material, under certain restrictions.
This refund Is called a "draw back."
418 STORAGE AND WAREHOUSING.
their products to meet the demands of the season when such
goods are salable. Wholesale houses frequently carry in ad-
dition to their regular stock, large quantities of
wJrehou^sM** merchandise in store, especially when confident of
a rise in price. Goods seized under writs of replevin
or attachment are stored awaiting judicial sale. Furniture and
valuables are stored awaiting shipment or use, etc. Free or
private warehouses are owned and conducted by private individ-
uals as a business. The rates are less than in bonded ware-
houses, as the business is free from Government restrictions, and
are based generally upon the space occupied in cubic feet. The
warehouse receipt given by a private warehouseman is an assign-
able instrument and may be used at the bank as collateral secur-
ity for money borrowed, or in many instances warehousemen
make advances to the extent of one-half or three-fourths of the
value of the property stored, charging interest at ruling rates.
Perishable goods, of course, do not find their way into bonded
or private warehouses. They are placed in cold storage.
COLD STORAGE WAREHOUSES.
Out of the development of our modern domestic and foreign
commerce and transportation systems has come the cold storage
warehouse. By means of cold storage the preservation through-
out the entire year, of meats, fruits, poultry, dairy products, fish
and vegetables has been accomplished to such an extent that the
seasons have become practically eliminated, and
Cold storage the priccs of thcsc neccssarics of life have been
made uniform. In the season of abundance, in-
stead of becoming a glut on the market, these products are placed
in cold storage and preserved until trade conditions will warrant
placing them on the market. Cold storage warehouses are con-
structed w^ith specially built walls of great thickness, containing
insulating material such as asbestos, cork, charcoal, shavings,
etc., and every precaution is taken against the admission of out-
COLD STORAGE. 419
side heat. Formerly cold storage products brought a lower price
in the market than those that were fresh, but under improved
cold storage methods they now bring as high a price in the
market and in some instances even higher. Eggs stored in
March and taken out in November, sell as high as the fresh com-
modity. Eggs have been kept two years and found perfectly
sweet when used. Five or six months is the usual period of
storage with most products.
It is estimated by a reliable authority that products worth
over $500,000,000 are placed in cold storage annually, in the
United States. Thousands of tons of meat are stored for pres-
ervation awaiting distribution; between three and
United state'L ^^^ million cases of eggs find their way into the
cold stores each season; between one and one-half
and two million 60-lb. tubs of butter, besides large amounts of
oleomargarine, are stored; some two to three million barrels of
apples are put in the cold rooms each fall, as well as great
quantities of other produce, including vegetables of all kinds,
molasses, tobacco, silks, furs, upholstered furniture, etc.*
The greatest center of the cold storage industry up to 1902
was Chicago, it having long been the greatest railroad center
and center of supplies, and, being the first to engage extensively
in the cold storage of eggs, became the egg center of the country,
more than 600,000 cases of 30 dozens each finding
Celfte^*°^*^* their way into the Chicago coolers each spring.
The greatest center, if Jersey City and Newark,
N. J., are included, is New York, partly because of the vast local
market and also because of her great export and import trade in
perishable goods.
Fish freezing and storing warehouses are now found in all
parts of the United States, including Alaska, as well as Canada
*These latter articles are placed in cold storage to protect them from
Insects. The leading retail dry goods houses In our large cities provide cold
storage rooms for such articles, for their own as well as their customers'
accommodation.
Fish
Meat
420 STORAGE AND WAREHOUSING.
and foreign countries. The great fish freezing and storing
houses in Washington, Oregon and Alaska, handle many millions
of dollars worth of fish annually. The fish are mostly halibut,
salmon and herring, and are frozen alive as caught, by placing
them in cold storage warehouses, from whence they are shipped
in refrigerator cars to the Atlantic cities and to
Europe. Cold storage of meat has reached its
greatest development in Great Britain, as that
country imports 60 per cent, of its meat supply. Vast quantities
are shipped from the United States, and besides a fleet of nearly
two hundred vessels is constantly engaged in carrying meat
from Australia, New Zealand and Argentina to England, the
meat being first frozen, and then kept frozen throughout the long
voyage across the tropics, in the cold storage holds of the ships.
By experiment it has been ascertained that certain tem-
peratures are best suited to the preservation of certain products
and in a well regulated warehouse it is comparatively easy to
maintain at all times the temperature best suited to the purpose.
Thus a temperature near the zero of Fahrenheit best preserves
fish, butter, ice cream, etc.; 20° to 28° furs and
Temperatures fabrics; 30° to 32° cggs; 31° to 33° apples, fresh
meat or cheese; 34° to 36°, pears, peaches and
other delicate fruits, vegetables and the retarding of plant growth
in flowers out of season. All these varied temperatures are main-
tained in different rooms of the same warehouse at the same
time.
The introduction of the refrigerating machine in 1890 gave
the first great impulse to the establishment of commercial cold
storage warehouses. Prior to that time ice and salt were the
only means of securing the desired temperature,
M*^!?!?*°'' ^nd this method is still in use to a small extent, but
Machine '
it is accompanied with serious objections, such as
the carrying away of the moisture from the melting of
the ice, the difficulty of obtaining sufficiently low temperatures
ARTIFICIAL REFRIGERATION. 421
or of keeping them under absolute control at all times, and,
especially in the south, the excessive cost of the ice required.
All these objections were overcome by the introduction of the
ammonia or carbonic acid refrigerating machine. Liquid an-
hydrous ammonia, which can only be kept so under pressure,
when allowed to expand into a gas, absorbs heat. The refrigerat-
ing machine simply reconverts the gas into a liquid to be again
expanded, absorbing more heat, again liquefied and again ex-
panded the process being continuous so long as the machine
continues in operation.
The charges for cold storing vary greatly, and only on the
most staple goods are charges anything like fixed. Apples
usually pay 15c. per barrel for the first month
Charges and lOc. per month thereafter. Butter for long
storage in zero rooms at about l/8c. per lb. per
month, at 5° below zero at l/6c. per lb. per month. For eggs the
charge is about 10c. per case per month or 40c. for the season.
May to January. The ordinary charge for storage of furs is: for
muffs 75c. to $1.00 and for fur capes or garments $1.00 to $2.50
for the season of eight or nine months.
The cold storage warehouseman, in addition to receiving
goods from others for storage, is often a purchaser and owner
of a considerable portion of the goods he stores. In Europe
generally, and in this country to a small extent, negotiable ware-
house receipts are issued for these goods and used as collateral
Warehouse ^^^ loans. The Icsscr use of these instruments of
Receipts as Credit in this country is due, partly at least, to
ecurity ^-^^ abscuce of any definite system of inspection
and of licensing and hence the lender depends largely upon his
faith in the integrity of the individual warehouseman. The
very fact that the goods are termed "perishable" casts suspicion
upon them as security for loans even though they may be of
the most staple character and as safe as any personal property.
Insurance is a serious problem for the cold storage ware-
432 STORAGE AND WAREHOUSING.
houseman, as a slight damage by fire to the refrigerating ma-
chinery might cause enormous damage to the
Insurance goods storcd; hencc insurance companies have com-
pelled the warehouseman to become a co-insurer
or pay additional premium on a "consequential damage" clause
in the policy.
TRANSPORTATION BY RAIL.
CHAPTER XLVIL
RAILROADING.
RAILROAD OWNERSHIP; CAPITALIZATION; TRAFFIC ASSOCIA-
TIONS; POOLING; DIFFERENTIAL RATES; ETC.
In 1830 there were thirty miles of railroad in the United
States. This had increased to 9,000 miles in 1850, to 53,000 in
1870 and to 192,162 in 1900. The total railroad mileage of the
world in 1900 was, approximately 445,000 miles, with a capital-
ized value of $35,000,000,000, and of this the United States
possessed 42 per cent. — nearly half. The railroad property in
the United States in 1900, consisting of track, rolling stock,
depots, shops and other buildings aggregated nearly $12,000,-
000,000. This enormous creation of property and development
of transportation facilities has been the product of seventy
years' effort and progress, all growing out of the application of
Development stcam power. The wide area of the United States
of Railroad will explain in a measure the enormous mileage of
ransportation ^^^ lailroad systems. The European countries
being of smaller area have shorter railway lines, and yet it
should be remembered that the United States has the largest
mileage in proportion to population of any nation. For every
10,000 inhabitants in the United States we have 26.1 miles of
railway; England, Scotland and Ireland, 5.2; Germany, 5.6;
France, 6.6; Eussia, 2.2; Spain, 4.2; Brazil, 4.7; and Argentina,
19.6.
The enormous development of our railway interests has been
the means of accelerating the commercial progress of the
438
434 TRANSPORTATION BY RAIL.
United States to a wonderful degree. This development has
not only been typical of the evolution of industrial organiza-
tions in this country, but in a large degree has assisted in bring-
ing about the wonderful industrial advancement which has been
made in the past fifty years. By means of the improvement in
transportation facilities our industrial and social
Evolution ^^^^ ^^^ heen revolutionized. Producers have had
their market widened until it is now almost a
world market, whereas before, the sale of many articles was
restricted to the localities in which they were produced. The
consumer likewise has a world market in which to buy. He
is not confined to his home production. The prices of all the
utilities of life are more nearly uniform, since improved trans-
portation has given them a better distribution. The variation
in prices due to situation has been lessened. Improved trans-
portation has also lessened the general prices of commodities,
since it enables either raw or finished products to be moved
cheaper, thus reducing the itemx of transportation which enters
into the final cost of the goods. It also enables the merchant
to "turn over'^ his stock or capital quicker and oftener and
thus do business at less expense and hence at a smaller gross
profit.
The development of transportation has also been the cause,
in a large measure, of the growth of our cities, since it enables
manufacturers to locate their plants in the great centers of
population where there is an abundant supply of labor, and
where shipping facilities are favorable, irrespective of the loca-
tion of the raw material. The steel mills of Chi-
Agricuiture ^^S° ^^^ Milwaukee are examples of this, being
situated at a considerable distance from the ore
and coal, but near populous centers. The location of great in-
dustrial plants in or near towns or cities adds to their financial
and commercial importance, and this in turn assists in their
growth. 'New agricultural districts have been opened up and
RAILROAD OWNERSHIP. 435
profitably cultivated, through the facilities for disposing of the
crops, afforded by improved transportation, while other districts
have been abandoned or changed to grazing land, on account of
the competition of more productive localities. Thus Massa-
chusetts has practically ceased to produce wheat, and now re-
ceives its food products from the west in exchange for its
manufactures.
The railroads of the United States are owned and conducted
almost entirely by private corporations. The majority of the
railroads of Germany belong to the government, and those of
most other European nations, except England,
Ownersliip ^^® uudcr the direction and control of the gov-
ernment. The advantages in favor of government
control are, that the system of transportation will be operated
at actual cost, thus saving to the people as a whole the profits
which otherwise would go to private individuals, and that the
power and control of the government will be extended and en-
larged. This latter may be desirable in a monarchy, where the
hand of the government is constantly upon all of its subjects.
The Roman Empire built extensive roads as a means of extend-
ing and solidifying its power. In a republic, however, the same
reason scarcely exists. The reasons against government control
are that we prefer to check, rather than extend, the power and
influence of our government; that private enterprise supplies
every demand for transportation facilities, and builds competing
lines which would not be built if our railroads were all under
government control; that the tariff rates for both passenger and
freight traffic are reasonable, and are made under government or
state restrictions.
The average capitalization of the railroads in
Capitalization the United States is lower than that of any other
country, being about $60,000 per mile. This in-
cludes costly bridges, such as those which span the Mississippi
river, tunnels through mountains or beneath cities, such for
426 TRANSPORTATION BY RAIL.
example as those under St. Louis or Baltimore, besides numer-
ous examples of costly expenditures in the execution of difficult
feats of engineering and construction. The English railroads cost
$200,000 per mile, those of France $128,000 per mile and of
Germany $105,000 per mile. This difference in cost between
American and European railroads has been ascribed to various
causes, but is no doubt due largely to the more permanent and
costly character of European roads. Perhaps more water in
the stock, items of general expense such as the cost of floating
the bonds, interest on the capital while the roads are under
construction and profits of construction companies, are included
as a part of the cost of European roads.
Inventions and improvements during the past twenty-five
years have steadily increased the efficiency of the railways and
made the transportation of both passengers and freight not only
more rapid, but safer and more economical. The substitution
of steel for iron rails, made possible by improved processes of
manufacturing steel, the use of heavier rails —
Efficiency morc than 120 pounds to the yard in some in-
stances — heavier cars, air brakes, automatic
couplers, block signals, all have combined to improve the effi-
ciency of our railway systems.
Another condition which has contributed powerfully towards
the general efficiency of the railways of the United States dur-
ing the past third of a century has been the consolidation of
companies and concentration- of management. The early rail-
way companies were small, and their lines were
Consolidations short with varying regulations and tariffs. Be-
tween Buffalo and Albany in 1850 there were
seven different companies operating, resulting in great incon-
venience to both passengers and freight traffic. The small
companies have nearly all entered into combinations, or been ab-
sorbed by large companies, until the railways lines of the coun-
try are now combined in a few great systems, with thousands
CONSOLIDATIONS. 4»7
of miles of track, such as the Pennsylvania, New York Central
and Santa Fe. As an example, the Pennsylvania system now
comprises over ten thousand miles and is composed of nearly two
hundred small railway lines. Many of these were purchased
outright by the Pennsylvania Company and absorbed into the
system, while others are operated as subsidiary corporations.
This great system transacts one-eighth of the entire railway
freight and passenger business of the United States.
Railway associations and agreements in regard to the main-
tenance of rates, character and conditions of service to be per-
formed, classification of freight, interchange of cars whereby
shipments between roads can be made without transfers from
car to car, establishment of rates, etc., have tended to further
develop the efficiency as well as economy of our railways. The
causes which brought about the organization of
Assocutions railway traffic associations were the necessity for
co-operation, through tickets and through bills
of lading, the interchange of cars with connecting lines, so that,
for example, a car load of grain could be shipped from Minne-
apolis to the seaboard without change, and the necessity for the
regulation of competition. As a result we have claim associa-
tions, car-service associations, passenger associations and other
organizations for the adjustment of all questions arising in
each department of railway service. The organization of small
companies into large ones and the consolidation of lines led to
violent competition and rate-cutting during the '70's, and was
finally overcome by the associations referred to.
From the organization of railroad associations it was an
easy step to "pooling," which consisted in dividing the total
earnings of several competing lines according to an agreed basis
irrespective of the amount of business actually done by the
different roads in the pool.* The organizing genius of Mr.
♦The dangers of a pool lie in the arbitrary power which it places in the
hands of a few men, to fix rates, control traffic and exercise a monopoly
which affects business interests extensively, but in this there is a reliei. from
428 TRANSPORTATION BY RAIL.
Albert Fink first developed the railroad pool. He organized the
Southern Eailway and Steamship Association (1875) in which
were included nearly all of the railroad systems of the south be-
sides several connecting steamship lines. The
Pooling object of this pool was to settle what portion
of competitive traffic each line should carry,
and those which carried more than their share were re-
quired to pay their rivals the excess receipts less the bare cost
of carrying. The "pooling" feature was more or less a promi-
nent one in nearly all railroad association agreements until pro-
hibited by the Interstate Commerce Act.t
The earnings of the railroads of the United States for freight
traffic are much more important than those for the passenger
service, being about three times the amount received for passen^
ger business. In some parts of New England where the popu-
lation is dense, the passenger receipts may equal the freight, but
a large portion of the freight of the country is hauled consider-
able distances, and the earnings ar.e correspond-
Freight Traffic iugly great. Our principal grain fields are 1,000
to 1,500 miles from the seaboard, and hundreds
of miles from the great commercial centers; our mines and for-
ests are situated long distances from the coal beds or the fac-
tories. The fruit from California and live stock from the
great plains of the w^est are carried to the Eastern market. This
movement of great quantities of bulky freight long distances
results in large revenues for freight traffic while the distance dis-
courages passenger travel.
Railway freight rates in the United States average but a cent
the evils of the competitive system with its rate wars and destruction of
profits which should accrue to stockholders or be used for the betterment of
the road,
fThe Interstate Commerce Law was passed by Congress in 1887, after
fifteen years of agitation and investigation. It prohibited unreasonable rates
and unjust discriminations, between persons, places and classes of traflBc,
prohibited pooling agreements, provided penalties for violations of its pro-
visions and established a commission of five men to enforce its requirements.
COST TO CONSUMER. 429
and a quarter per ton per mile.*. This is lower than any other
nation and probably not more than half what it was thirty
or forty years ago. Improved machinery, Bessemer steelt and
competition have caused a steady decline in the rates. This
decline has been accompanied by a general lowering of the
prices of the most important articles of traffic, and would have
been even greater but for the fact that it was made
Consumer ^^ ^^® ^^^® °^ stcadily advancing wages for labor.
In the case of most commodities the public will
buy and use a given quantity at a fair price. If then the price
is lowered, the quantity consumed will be increased, or if the
price is raised, the quantity will be diminished. Transportation
charges are properly regarded as a part of the first cost of all
those commodities which must be transported from the producer
to the consumer. The consumer always "pays the freight" as
well as the profits of the middlemen, in addition to the original
cost. Each producer, then, who desires to extend his business
or increase his sales, perceives at once that it is only necessary
for him to secure lower rates on his shipments. Any concession
in rates cheapens the cost to the consumer and increases the
volume of sales. Whether certain articles shall he sold in a
given locality often depends upon freight rates from two com-
peting points. Whether salt from Michigan or from Kansas
will be marketed in St. Louis depends upon the freight rates be-
tween these two localities and St. Louis. Whether shoes made in
Chicago can be sold in Pennsylvania in competition with eastern
shoes, depends upon the freight rates. A persistent pressure is
being constantly brought to bear upon the railroads by both
shippers and consumers to secure a reduction of the transporta-
tion charges in order to extend sales or reduce the cost of pur-
*Our average passenger charge is 2.35 cents per mile, while that of most
European countries varies from 1.3 to 2 cents.
t Price of Rails Per Ton— 1868 1872 1876 1880 1884
Bessemer steel 158 112 59 67 31
Iron 79 85 41 49
480 TRANSPORTATION BY RAIL.
chases. This was strikingly illustrated by the rivalry which
existed at one time between our principal seaboard cities. New
York, Boston, Philadelphia and Baltimore, in
Rates^"^*^^ their efforts to secure export business. So great
was the pressure brought to bear on the railroads
by the commercial organizations of these cities in their com-
petition for export shipments that rates were utterly demor-
alized. This was through the competition of the cities, as well
as the railroads, and to such an extent was the contest carried
that in 1882 it culminated in arbitration proceedings in which
the questions involved were submitted to a committee consisting
of Messrs. Allen G. Thurman, Elihu B. Washburne and Thomas
M. Cooley, for adjustment. The findings of the committee re-
sulted in fixing the relative freight charges to these ports, called
^^differential rates," upon such a basis that they have remained
practically unchanged since. By this adjustment Philadelphia
was given a small advantage over New York, in the matter of
rates from the West, and Baltimore, a still smaller advantage
over Philadelphia. Owing to a threatened diversion of the grain
trade of the Northwest to Gulf ports, the rates on grain to all
eastern ports have since been materially reduced to meet this
competition. A '^^differential" rate then may be defined as one
which is made between two points, not with respect to the dis-
tance as traversed by the different transportation lines, but with
regard to competitive traffic. Thus between Chicago and New
York the passenger fare is the same on several ,lines of railroad,
and yet the distance traversed varies more than four hundred
miles.*
While it is strictly true that a decrease in transportation
charges causes, as a rule, an increased demand for the products
♦Between Chicago and New York there are over twenty routes rarying
in length from 912 to 1,376 miles, which compete for traffic. Between St.
Panl and Chicago the short line distance is 373 miles and traffic is carried
by a line 734 miles in length. Between Omaha and San Francisco five roads
Qompete, varying in length from 1,865 to 2,765 miles.
DIFFERENTIAL RATES. 481
shipped, nevertheless this rule is not an invariable one. There
are commodities which form a partial exception, and if consider-
able reductions in cost were made, the volume of business would
be but slightly augmented. For example, rates on boots,
shoes, clothing and household utensils, if reduced
G*rrai°Rui*° * would uot materially increase consumption, since
people are inclined to purchase such articles as
they are needed. The same could be said of coffee, tea, salt
and those articles which are consumed in small proportion to the
total value of the requirements of consumers. In making
rates then for freight traffic, it would be useless for an associa-
tion to reduce the tariff on those articles which have a fixed
and uniform demand, and would not be influenced by a
reduction.
CHAPTEE XLVIII.
TRANSPORTATION BY RAIL— Contkiued.
CLASSIFICATION OF FREIGHT; FREIGHT RATES; COST OF
SERVICE; ETC.
Almost an infirite variety of commodities is offered to the
railroad companies for transportation. If all articles were
embraced under a single schedule and charged according to bulk
or weight, irrespective of value, those articles having large bulk
with small value would be charged exorbitantly, while articles
having small bulk would escape their just portion of trans-
portation charges. Thus coal, grain and lumber
of^Frlf'^hr"" would be subjected to a charge which would be
prohibitive, and would place them beyond the
ordinary uses for which they are now produced. The problem in
the classification of freight is to so fix the tariff as to produce the
greatest amount of revenue for the railroad and at the same
time not fetter or hinder the transportation of products by ex-
cessive charges. The tariff rates upon transportation lines have
an important bearing upon the prosperity of the communities
through which they run, by stimulating or retarding production
of commodities. The earliest freight tariffs involved a very
imperfect classification, and each railroad had its own system,
but as the through business developed, this multiplicity of
freight rates was found inconvenient and cumbersome, making it
difficult for shippers or buyers to ascertain in advance what the
freight charges upon a long-distance shipment would be.
Kailroads divide their freight into four or more general
classes, according to bulk and value. Goods having great value
and small bulk, such as dry goods and groceries, are placed in
433
CLASSIFICATION OF FREIGHT. 433
the first class. Lumber, fuel, grain, ore and other bulky but
low priced commodities are placed in the fourth or a lower
Object in class. Goods of the first class are charged two or
Classification three times as much for transportation as those
reight embraced in the fourth class. It is true that
the greater risk assumed in carrying goods of high value, to-
gether with the extra care and labor in handling or storing them,
will in a measure justify a higher freight charge, but this is
very slight in comparison with the difference between the rates
upon the two classes. The carrying charges upon different
classes of freight are not based upon the cost of the service, but
upon what traffic will bear. If a ton of lumber were sub-
jected to the same freight charge as a ton of dry goods, no
lumber would be shipped. The freight rate would be practically
prohibitive. Thus by means of a wise classification of freight
the cheap trafiic is made possible, and the high-class traffic is
not seriously hampered, the railroad revenues are increased by a
large volume of business and the public wants are satisfied. Some-
times a commodity is placed in two or more classes depending
upon the quantity shipped. Thus car load lots receive a lower
rate than is allowed to the same commodities in less quantities.
In former years railroad companies sometimes placed certain
commodities in a lower class temporarily in order to stimulate
new industries or develop traffic in certain direc-
Unjust Dis- ,. T 1 . . •IT
criminations tious. Large shippers were given special ad-
vantages over small ones in the form of rebates
against their freight bills, and competing points were accorded
lower rates than non-competing points. An extensive system
of favoritism and discrimination thus grew up which abounded
in injustice to the public, and interfered with the natural oper-
ations of trade. To remedy the evil, Congress, in 1887, en-
acted the Interstate Commerce Law, designed to .prevent un-
reasonable rates and unjust discrimination between persons,
places and classes of traffic.
434 TRANSPORTATION BY RAIL.
At first impression it would seem that the charge for carrying
freight should depend wholly upon what it costs the company
to perform the service, and include a fair profit for the capital
Factors in employed in the husiness. But freight rates are
Determining not usually fixcd in this way. Three factors must
reight ates -^^ taken iuto account in determining rates. The
first is, what will it cost the company to furnish such service?
Second, what will the shipper be willing to pay, or what can
he afford to pay? Third, what competition among other trans-
portation lines, by eithe ; land or water, must be met or over-
come in order to secure tl e business. These three factors in the
problem must be considered in arriving at the freight rate.
It is not practicable to fix rates on a basis of cost of service,
because it is not possible to determine in any particular case
what the actual cost of the service has been. Thousands of
items must be taken into consideration in arriving
Cost of Service at the total expenses of running the road, and no
official can say just what proportion of these ex-
penses should be chargeable against any particular shipment.
Again, as previously stated, it is only by charging certain com-
modities of high value a large profit over the cost of service, that
commodities of low value can be carried at a very low rate.*
Fixing rates according to the value of the service to the
shipper, or what he can afford to pay, is called "charging what
the traffic will bear." This method aims to make the charges
such as to produce the most revenue to the railroads without at
the same time reducing the volume of traffic. If
Win Bear ^^ ^ ^^® scrvicc is of great value to the shipper, and
enables him to reap a large profit on the goods
shipped, he can well afford to pay a liberal freight charge, and
this will enable the railroad company to carry other and less
♦Commodities of low value are carried at low rates also on account of the
large volume of that trafllc and the slow speed of the trains. Thus coal
trains run at low speed, while trains loaded with perishable goods must be
run at a much higher speed, and at an increased cost.
FREIGHT RATES. 435
profitable merchandise at a low rate. Expensive articles of
small bulk will bear a high charge without adding much to the
percentage of increase in cost caused by the carrying charges,
while farm products and other bulky freight must have a low
rate, or they will not be produced and shipped.
Competition must always be taken into account in fixing
rates. Charges must be fixed and modified according to the
varying conditions under which railway traffic is conducted.
There is not only the competition of rival lines of railways, but
also that of waterways. In a very large portion of
Competition the United States shippers have a choice of trans-
portation by rail or by water upon the great lakes,
rivers and canals. There is also the competition of cities and
markets to be taken into account. Thus the Atlantic cities are
in sharp competition with gulf ports or outlets for the products
of the Northwest. A more favorable market in one city than
another will influence the stream of traffic in a corresponding
direction. Competition then is an important factor in determin-
ing freight rates.
Attempts have been made in various states to prescribe that
freight charges shall be in proportion to distance. Such rates
are termed "equal mileage rates." But these are obviously un-
fair since it costs a railroad company more than half as much
to carry a shipment fifty miles as to carry it one hundred miles.
Goods must be stored, handled and billed, the same for a short
distance as for a long one. Once loaded upon the
RatM ***^' ^^^^' ^^^y require very little care until they reach
their destination. An equal mileage rate there-
fore is an injustice to either the railroad company or to the
public.
Owing to competition and other causes it was thought neces-
sary in some cases, in order to secure business, to take freight
for a through shipment at a lower rate than was charged for a
local shipment — to charge less for the entire distance than for
436 TRANSPORTATION BY RAIL.
a part. This is called the "long and short haul/' and would
seem to be discrimination of the most unfair and objectionable
kind. It was quite common in railroad manage-
Short Haul ment prior to the passage of the Interstate
Commerce Act, by which it was made illegal
in all cases when both charges were made under "sub-
stantially similar circumstances and conditions.'' Such dis-
criminations have now become infrequent, and yet there are
instances when the long and short haul discrimination is justi-
fiable. To illustrate, the steamship lines doing business be-
tween New York, other North Atlantic ports and New Orleans
offer such competition to the railroads that they must either
make a discrimination in favor of the long and short haul or fail
to secure the business. Intermediate points are not affected
by the water competition. The railroads can afford to take
their through business at a slight advance over actual cost
of service rather than not have it. They could not reduce their
local rates to the same basis without destroying their profits.
Again, were railroads in the United States parallel those in
Canada, a discrimination is justifiable, for if our railroads were
compelled to maintain their through rates on the same basis as
their local traffic, it would have the effect of sending through
shipments of grain via Canada where the railroads are not under
such restrictions, and would merely put profits in the pockets of
foreign railroad owners. The Interstate Commerce Commission
has held that competition against foreign railroads is sufficient
grounds for lower rates from terminal points.
For the purpose of facilitating the shipment of freight, and
especially where the property is to be shipped a long distance,
over several lines of railroad, fast freight lines have been
formed. Nearly all of the business from the West to the
Atlantic seaboard and territory east of Buffalo and Pittsburgh
is handled over fast freight lines. A few of these fast freight
lines own their own cars, do their own billing and conduct
their business distinct from that of the railroad companies, pay-
FAST FREIGHT LINES. 437
ing the different roads a mileage for hauling their cars. Most
of the fast freight lines, however, are combinations of the rail-
road lines merely for the purpose of facilitating
Fast Freight |}^g interchange of freight, and to expedite the
shipment. The railroad companies do their own
billing and send a tissue copy to the fast freight office.
The cash receipts are apportioned among the different roads
in proportion to the mileage of each or on other agreed bases,
and in case of a claim of damages, the matter is taken up and
adjusted between the roads. The fast freight line in this in-
stance becomes a sort of clearing house for carrying out a
mutual arrangement between two or more lines of railroad.
The methods of handling freight for through shipment have
been so perfected that the railroads now receive goods con-
signed to all stations on any road, and even to many foreign
cities. Upon delivery of the goods to the railroad agent the
shipper or "consignor" is furnished with a receipt in the form
of "Bill of Lading." Freight is shipped in two
Sh!pmlnt ways, "straight consignment" or "order." When
a straight consignment bill is issued, the goods
must be delivered to the consignee or to the person to whom he
may order them delivered as his agent. Most shipments are of
this class. An order bill is one that may be transferred by en-
dorsement. Such bills are usually for the purpose of securing
the payment at destination of a draft drawn for the value of
the property. The draft is usually pinned to the bill of lad-
ing, and both are sent through a bank for collection. When the
draft is paid the bill of lading passes to the payer. The bill
of lading is also endorsed to him and he may then claim the
property. A way-bill containing the number and initials of
the car, names of consignor, name and address of consignee,
place of shipment, place of destination, description, weight or
number of articles, class and rate of freight, and total freight,
is made out for each shipment, and accompanies the goods
through to destination.
FOREIGN COMMERCE,
CHAPTER XLIX.
TRADE RELATIONS WITH FOREIGN COUNTRIES.
DUTIES; RECIPROCITY; BOUNTIES; SUBSIDIES; NAVAL
PROTECTION.
We scarcely realize to what extent we are dependent upon
the products of distant countries and climes for the comforts
which we are constantly enjoying. The clothing which we
wear may be from wool grown in Australia or from silk grown
in France or Italy; the leather in our shoes may
lustrations havc come from the plains of Uraguay or Argen-
tina; the furs that keep us warm are from the far
north; the rubber that protects us from rain was the sap of a
tree in Brazil; the coffee we drink was grown in Mexico or
South America and the sugar and spices which we consume
were grown under a tropical sun. Not only are we dependent
upon the worlds but in turn we contribute to the world's demand.
A large portion of the beef supply of England is grown upon our
great western prairies; the wheat from Dakota becomes bread in
Europe; the cotton from the south clothes the peasantry of the
Old World; the oil from the wells of Pennsylvania is trans-
ported to distant lands and affords cheap and safe light to
those who have lived heretofore in semi-darkness, while Ameri-
can agricultural implements, sewing machines, tram cars, clocks,
watches, typewriters, electrical apparatus and rubber goods
are furnished for world-wide consumption. Merchant ships
carrying the products of all nations are upon every sea. They
cross and re-cross, braving every danger in order that they may
distribute the products of factory, field, mine and forest.
438
FOREIGN COMMERCE. 489
The growth of business relations between the United States
and foreign countries has not been uniform during our history,
Histor of "^^ ^^^ ^^ ^^P^ P^^^ ^'^^^ ^^^ progress in domestic
American affairs. We have been chiefly absorbed in the
Commerce development of home industries. Now and then,
under favorable conditions, such as navigation or tonnage laws
our foreign trade has advanced. The past thirty years has
witnessed a wonderful development in foreign commerce, and
our exports during this period have almost uniformly exceeded
the imports. This development has been owing to the increase
in the surplus of our food products, especially breadstuff s; to
the development of inventions and methods of transportation;
to the increase in the volume of our manufactures; and to the
policy of reciprocity which has been in force during a portion
of this time. Improved methods of transportation have enabled
the products of the west to reach the seaboard cities and from
thence European markets at such rates as to enter into com-
petition with similar products of other countries. Without
modern appliances the large export trade in fresh meats, butter
and fruits could not exist.
The foreign commerce of a nation is vitally affected by its
tariff policy. If it imposes duties upon imports it thus in a
measure discourages the importation of foreign merchandise in
order to stimulate home production. Or it may
Export Duties iHipose dutics upou cxports in order to encourage
their home consumption.* Both import and export
duties tend to diminish the volume of foreign commerce. On
the contrary, the policy of free trade tends to encourage and
increase foreign commerce. England has been practically a free
trade country since 1850t and her foreign commerce far sur-
*Our constitution expressly prohibits the laying of duties upon exports.
fThe only duties now under English law are a small export duty on
coal Imposed in 1901, and import duties on playing-cards, cocoa, coffee,
chicory, dried fruits, tea, tobacco, wine and beer, spirits, liquor, cordials,
and other articles manufactured of or containing spirits.
440 FOREIGN COMMERCE.
passes that of any other nation. It should be remembered,
however, that England is an export country. The limited area
of the British islands compared to their manufacturing capacity,
offers but a small home market for an enormous output of manu-
factured products. Hence what England needs is cheap raw
materials brought in duty free, to be converted into finished
products for world-wide sale. The United States has pursued
the policy of a tariff upon imports, and has shaped this tariff not
with a view of fostering foreign trade, but as a protection to
home industries. The duties have been especially high upon
all classes of products which are produced within the United
States in order to prevent the competition of foreign countries.
The enlightened policy of reciprocity has been one ipeans
of promoting foreign trade. Under this policy two nations
mutually agree to admit the products of each other into their
ports, either duty free, or at a reduction from the regular tariff.
Congress passed an Act in 1890 under which reciprocity agree-
ments were entered into with Cuba, Porto Rico
Reciprocity and scvcral Central and South American countries,
the effect of which was to greatly stimulate trade
with those countries, but the law was abolished, and the agree-
ments terminated on Aug. 27, 1894, after which our trade with
those countries declined. We now have reciprocity treaties in
force with several European nations* and under their potent
influence our foreign trade with those nations is growing apace.
A bounty is a fee or percentage paid by the Government to
a manufacturer for products exported, as an encouragement to
Bounty ^^^ industry. By means of this Government aid
Countervailing the manufacturer is enabled to sell his products in
"*^ a foreign market at a lower price, and thus com-
pete with foreign manufacturers. The opposite of a bounty
is a countervailing duty, levied upon imports in order to neutral-
*Under the Act of 1897, the United States made reciprocity agreements
with Germany, France, Italy and Portugal, which are still in force.
DUTIES. 441
ize the effects of a bounty offered by the government from which
the goods were shipped. For example, Germany and several
other exporting nations of Europe pay a bounty to their manu-
facturers on all sugar exported. Such sugar when imported into
the United States has an advantage in our markets on account of
the bounty, over Cuban sugar or that from our own refineries.
To offset this advantage and protect other sugars in our markets,
our Government may levy a countervailing duty in addition to
the regular tariff.
Navigation and tonnage laws have at different periods been
resorted to by this and other countries as a means of foster-
ing shipping and encouraging foreign commerce. Soon after
our Constitution was adopted, the United States passed a series
of tariff and tonnage Acts by which the duties were lower on
goods imported in American vessels entering our
^o^n'^nagrActr** P^rts. About 1850 both England and the United
States abandoned the policy of navigation laws
and since that date no effort has been made through legislation
to build up a merchant marine.* As a result our shipping in-
terests have steadily declined since 1857. At that time we
carried 75 per cent, of our foreign commerce in American ships.
In 1902 this percentage had fallen to a little less than 8 per
cent.
The term subsidy, as applied to shipping denotes the gift of a
sum of money, either annually or otherwise, by the Government
as an aid and encouragement to the extension and up-building
of marine interests. From 1846 to 1856, — a period of ten
♦A law was passed in 1792, and is still in force, requiring all ships
whicli carry tlie United States flag and are registered as belonging to tlie
United States, to be made in this country. Instead of stimulating ship-
building in this country, this law has had the effect in recent times of
causing large amounts of American capital to be invested in foreign-built
8 ips, carrying foreign flags, since a steel ship could be built on the Clyde
from fifteen to twenty per cent, cheaper than in this country. The abolition
of thiis law is advocated by those who favor "free ships," so that American
capital can sail under our flag, without regard to where the ships are built.
443 FOREIGN COMMERCE.
years, our Government pursued the policy of subsidizing steam-
ship lines by paying large bounties for carrying the United
States mails. As a consequence the tonnage of our steamships
registered for deep-sea carrying, which in 1847 was 5,631 tons,
increased to 115,045 tons in 1855, and our Mer-
Tramps*^ chaut Marine reached its greatest height of
strength and glory. The Collins Line of mail
steamers was established between New York and Liverpool,
under a favorable contract for carrying the mails and success-
fully competed with the heavily subsidized Cunard Line of
England. Contracts were also entered into by our Government,
with lines of steamers to the West Indies, Panama and Pacific
Coast ports. But in 1856 the law was modified and the sub-
sidies seriously reduced. In 1858 the subsidies were virtually
abolished and the actual postage rate on letters carried was sub-
stituted. This continued to be the policy of our Government
until the enactment of the Postal Aid Law of 1891, which in a
measure increased the compensation for carrying the mail.
England has encouraged shipping by liberal subsidies, and
through this means has built up lines of steamers to all parts
of the world. She has awarded liberal contracts to her ship-
yards for the construction of war ships and trans-
subsiSes ports in order to encourage the extension of priv-
ate shipyards. Direct subsidies to shipbuilders
and shipowners who would build after plans furnished by the
Admiralty, and enormous indirect subsidies for carrying the
mails, supplies or troops have been bestowed, by the English
Government. France pays a bounty per ton on all ships built
in French shipyards of steel and a subsidy per ton for every
thousand miles sailed by French vessels.
A "tramp" steamer is one which has no regular sailing route,
is not subsidized and goes to any port where it can secure a
cargo. English and German tramp steamers are in all parts of
the world. Sometimes a period of one or two years elapses
SUBSIDIES. 443
before a tramp returns to its home port. Such ships have the
advantage over those of a regular line, in that they are not
obliged to sail on fixed dates and perhaps with insufficient cargo,
but may cruise from port to port until a cargo is secured. Sail-
ing ships aim to make direct voyages in which they can carry
cargo both ways.
One of the first conditions of foreign commerce is the pro-
tection of property and persons in what ever part of the earth
they may be. This can only be secured by a navy which shall
command respect in every sea and port. "Trade
I'^l'; ^°"°'^^ follows the flag" is a commercial aphorism now
the Flag » . -xr ■•
well recognized by the great nations. No nation
can hope to build up a large or prosperous foreign commerce
which has not a well-equipped navy* sufficiently large to enable
it to scatter ships to all quarters of the civilized world, within
protecting distance of the interests of its citizens. Ship cap-
tains in the absence of Consuls should be allowed a degree of
discretion in the settlement of questions requiring prompt action,
where the rights of American citizens are in jeopardy. English
ship captains have such discretion and may exact reparation for
wrongs inflicted upon a British subject in a foreign port with-
out waiting to communicate with their home Government.
As an important adjunct to our coastwise and foreign com-
merce the Government maintains over two thousand light houses
at all danger points along our coasts, besides several thousand
buoys, fog-horns and bells as guides to ships entering or leaving
our harbors. Harbor masters are appointed whose duties in-
clude the regulation of shipping within the har-
Buo^ys^Etr^' ^°^^' licensing of pilots, inspection of ships, etc.
Although ships may sail upon any sea it is cus-
tomary to require all vessels to be registered in some country.
Ships are then said to belong to the country in which they are
•The United States stands fourth among the great nations in the tonnage
of its navy, England being first, France second, and Russia third.
444 FOREIGN COMMERCE.
registered, and bear its flag. The ship carries papers stating the
facts concerning its registry, ownership, inspection to secure
safety, the name of the port from which it last sailed, its destina-
tion and the nature of its cargo. The custom of carrying papers
originated in the attempts to suppress piracy, but is continued
to the present time, chiefly for the information which it fur-
nishes of a commercial nature.
CHAPTEK L.
FOREIGN COMMERCE— Continued.
INTERNATIONAL LAW; TREATIES; CONSULAR SERVICE; FOREIGN
EXCHANGE.
The law of nations is a system of usages, customs and opin-
ions founded upon the general principles of right and Justice
as understood in this enlightened age, and which has become
established by the great nations of the world.
Law°*^°° This system regulates the conduct of nations
towards each other commercially as well as polit-
ically, and is binding upon all by common consent. The great
nations of Europe together with the United States, being, as we
have reason to believe, the most enlightened and just of the
world, as well as the most powerful, have established a code
of international law peculiar to themselves. Under this law
treaties are made and enforced, commerce between countries is
regulated and the rights of citizens abroad are protected.
Treaties are of three kinds, viz., treaties of commerce,
treaties of peace, and territorial treaties. Treaties of commerce
define and establish the rights and extent of commercial inter-
course. Every nation may enter into commercial treaties and
grant such special privileges to other nations as it sees proper.
It may grant special privileges to one nation over
Treaties another, or enter into special agreements as in the
ease of reciprocity treaties. It may even refuse to
conduct any intercourse whatever with foreign nations, as was
the case when President Jefferson laid the general embargo on
445
446 FOREIGN COMMERCE.
trade in 1807, or it may reserve to itself such portions of its trade
as it deems proper. An instance of this may be seen in the
reservation of the coasting trade of the United States to our
own ships. Treaties of peace are made as a result of war. They
may provide for the payment of money, as indemnity, the cession
of territory or the granting of special privileges, such as coaling
stations, etc. Territorial treaties are in effect contracts made
between nations for the purchase or sale of domain. Such was
our treaty with France for the purchase of Louisiana, with Spain
for the purchase of Florida, with Mexico for the Gadsden pur-
chase, and with Eussia for the purchase of Alaska.
In order to regulate foreign commerce, carry out the pro-
visions of treaties and protect the rights of citizens abroad each
nation exercises jurisdiction over its seamen, vessels and mer-
chandise in foreign lands. This is done through the consular
service. In every port of any consequence throughout the
world the United States is represented by one or more consular
officers. These are divided according to their
serv^clT'^ rank and importance, into Consuls-Greneral, Con-
suls, Vice-Consuls, Consular Agents and Commer-
cial Agents. They are appointed by the President, and their
compensation is fixed in one of three ways, viz.: (1) A fixed
salary. (2) A salary with permission to engage in business, and
(3) Fees, with permission to engage in business. Those who
receive a fixed salary and devote their entire time to the duties
of the office, embrace all of those officials who occupy posts in
the foreign cities with which the United States has extensive
trade relations. In this class of consulates the receipts from
fees are paid over to the government. Those consuls who are
allowed to engage in business occupy stations where the business
of the consulate does not engage their entire time, and those
who receive fees and are allowed to engage in business occupy
posts in which the duties of the office require but a small part of
the agent's time.
CONSULAR OFFICERS. 447
The duties of consular officers in foreign ports are numerous
and embrace the carrying out of treaty regulations; adjustment
in cases of disagreement between master and seamen; salvage
in cases or shipwreck; receiving reports of ship-captains on enter-
ing and leaving the port; sending to the home
conrui^^officer government reports on the condition of trade;
granting of passports and protection of citizens;
care of property of deceased citizens; extradition of fugitive crim-
inals; certification of invoices of goods to be shipped to the
United States, etc.
This latter is one of the most common duties of a consul.
The invoices of all goods imported into this country must pass
through the hands of the American Consul at the port from
which they come.* If the goods are to be shipped from an in-
terior town or city they are forwarded with full particulars as
to their value, size, number, etc.; to a shipping or forwarding
agent in the seaport town who for a small commis-
fnvokM ^i°^ attends to the details of shipment. The
shipper makes out an invoice, — three copies.
These he takes to the office of the consul, and makes oath that
the prices, quantities, etc., are absolutely correct. The oath is
a precaution against fraud, for otherwise an American importer
and foreign merchant might enter into a collusive arrangement
for falsifying an invoice and making the price lower than it
really was, thus defrauding the Government out of a portion
of its revenue. The consul files one copy of the invoice at his
office; one copy he sends to the custom house where the goods
are to be entered for export and the third is given to the shipper,
together with the consul's certificate. The shipper then turns
the goods over to the agent of the steamship line, and receives a
bill-of -lading also made out in duplicate or triplicate. The ship-
*Likewise the invoices of all goods exported from the United States must
pass through the hands of the foreign consul at the port in the United States
from which they are shipped.
448 FOREIGN COMMEKGE.
per keeps one copy of the bill-of-lading, one copy is pinned to
the invoice and consular certificate and forwarded to the con-
signee at the port of destination; and in some instances one copy
goes to the ship's captain, as the "Captain's Copy."*
An important factor in foreign commerce, and one which ex-
porters frequently overlook, is the proper packing of goods for
export. This should be governed almost wholly by the condi-
tions to be met with in the country to which the goods are sent.
For mountainous countries without good roads, as for example.
South America, goods destined for interior towns
Packing Goods are transported upon the backs of mules over
rocky and tortuous roads, and hence must be
packed in boxes or bales that can be readily carried in this man-
ner, one-half the load being Upon each side of the animal.
Again the arrival of goods in the rainy season or in the dry
season would niake a difference as to the method of packing,
but as a general rule all merchandise which would be injured by
water should be packed in boxes lined with zinc and oilcloth, or
waterproof paper, or if packed in bales should be covered with
oilcloth or tarpaulin beneath the outer coverings of the bale. As
far as practicable only one kind of goods should be packed in a
box or bale, otherwise there may be trouble in passing the goods
through the foreign custom house.
Houses engaged in foreign commerce use a distinctive mark
— a trade-mark, — of such a character or design as to be recog-
nized by the purchasing public in whatever country the goods
are offered for sale, as the mark of the American
Trade Marks manufacturer or exporter. We are told that the
"Mt. Vernon" brand of flour made by George
Washington was accepted abroad as of especial excellence, and
the same would be true to-day in regard to the value of a special
♦When a bill-of-Iading is made out to order it is transferable by en-
dorsement the same as inland bills. The bill has printed across its face
"Original," "Duplicate" or "Triplicate," one of which being honored by
delivery of the goods, the other two become void.
^s^ TRADE MARKS. 449
name or mark. Foreigners are often unable to discriminate or
judge of the merits of foreign manufactures, and knowing that
a certain brand has been tried and found satisfactory, they con-
tinue to purchase it. The United States has entered into agree-
ments with nearly all of the leading commercial nations with
regard to the protection of trade-marks, but in order to secure
this protection the trade-mark must be registered. Mere use,
however long continued, does not, as in this country, determine
the right tc the exclusive use of the mark.
An important element in foreigr trade operations is the
banking feature. As previously explaired, one of the important
functions of banks is to supply the necessary capital to bridge
over the interval of time between producer and
FertuTe^ consumer. This in the case of foreign trade is
necessarily considerable, since the producer or
manufacturer is situated perhaps thousands of miles from the
consumer, and weeks or even months are required before the
products reach their destination and are paid for. When goods
are shipped to a foreign customer in many cases no drafts are
drawn, the amount being simply charged in account to await
remittance by bank draft through due course of mail. In other
cases documentary drafts are drawn for the shipment C. I. F.*
and forwarded through the bank. Such drafts are usually pay-
able at sight or a given number of days after sight and the
shipping documentst attached are to be surrendered on payment.
If the draft has considerable time to run it is generally dis-
counted with a home banker.
Drafts drawn against foreign shipments are usually made pay-
able in the currency of the country in which they are to be paid.
Thus a shipment to Germany is payable in marks, to Mexico in
pesos, etc. The seller takes the risk of fluctuations in exchange.
♦C. I. F. means cost, insurance and freight.
f Tlie shipping documents here referred to consist of invoice, bill-of-lading
and insurance certificate.
450 FOREIGN COMMERCE.
and this is one of the disadvantages in selling to customers the
rate of exchange in whose country is not uniform.
The bank forwards the draft with documents attached to a
bank at the place where it is payable. The bank there presents
the draft tor payment or acceptance. If a time draft, the goods
are usually landed and warehoused by the bank,
Exchange Until the draft is paid. In case the consignee
desires t^ withdraw a portion of the goods from
the warehouse he may arrange with the bank to do so by paying
a portion of the draft, the amount being endorsed thereon. At
maturity the draft is paid plus interest from its date until the
approximate time it will require a remittance to reach the point
of shipment in the United States, and also plus the storage
charges. The bill-of-lading and insurance certificate are de-
livered to the drawer when the draft is paid.
Within twenty-four hours after a ship touches a dock in
any port of the United States the captain or a duly authorized
officer must hand in to the Custom House the "Ship's Report,"
No goods can be landed nor even bulk broken until this formal-
ity is complied with.* This report is a document in
ofswps* prescribed form giving the name and tonnage of
the vessel, name of the captain, number of the
crew, port from whence arrived, and a full and complete detailed
list of the entire cargo, the number of boxes, bales, barrels or
casks and their contents so far as is known, the names of the
shippers and the consignees. This report is made out in dupli-
cate. One copy is retained in the Custom House and the other
is sent to an officer at the dock where the ship is to unload,
who checks off the goods as they are discharged from the vessel.
The goods are now delivered to holders of bills of lading, upon
payment of the freight and duties or other charges, or if not
called for at once, are sent to bonded warehouses.
♦This report is usually given to the custom house officer who comes
aboard, in many cases with the health officer.
CLEARANCE OF SHIPS. 451
When a vessel is completely loaded the master must, before
being allowed to sail, receive his clearance papers from the
port authorities. The permit to sail is based upon
of'shtps'^'^ the captain's report of cargo and passengers, pay-
ment of dockage, pilotage, seamen's wages, etc.
When these are satisfactory, permission is given to sail.
FOREIGN EXCHANGE.
CHAPTEE LI.
INTERNATIONAL SETTLEMENTS.
INTERCHANGEABLE VALUES; MINT PARITY; ARBITRAGE; GOLD
SHIPMENTS.
International trade, or the exchange of commodities between
nations, requires a medium by means of which resulting balances
can be satisfactorily settled. The ultimate medium adopted for
this purpose is pure gold, and this metal is the basis of all cal-
culations in connection with foreign exchange. Of
Value of course for practical purposes the metal must have
^^^ an alloy, and each nation has determined the
quantity of base material employed independent of other coun-
tries, but nevertheless they are all pretty nearly in unison. The
general system employed is 9-lOths pure gold and 1-lOth alloy,
with the exception of Great Britain, which uses 11-12 and 1-12.
A further circumstance is the legal value placed upon the metal,
thus giving assurance for all time that its value will be stable;
and it is this officially made stability which renders it possible
to determine the value of the money of one country in that of
another. The value of gold in the following countries as de-
termined by law is respectively:
Great Britain, 1 oz., ll-12ths fine = 77/10
United States, 25 8-lOths grains, 9-lOths fine, $1.00
Germany, 122.915 grains, 9-lOths fine, M. 20
Latin Union, 99.561 grains, 9-10th8 fine, F. 20
Taking these gold values as a basis we arrive at the follow-
ing interchangeable values of the various coins:
452
FOREIGN EXCHANGE. 453
One pound sterling weighing 123 27-100 grains 11-12 fine
equals $4.8665, equals Fc 25.2215, equals Marks 20.4296. This
Interchangeable "^^ what is termed the mint parity, or the value
Values at which the respective mints in London, Wash-
Mint Parity ington, Paris and Berlin, would accept the coins
of each of the other nations.
The following weights of the principal coins of the four
above-named nations, will enable the student to follow out the
calculation for himself:
1 Eagle or $10 = 258 grains, 9-10 or 232 grains pure gold.
Sovereign, £1, = 123.270 grains, 11-12 or 113 grains pure gold.
1 Double Crown, or M. 20 = 122.915 grains, 9-10, or 110.624 grains
pure gold.
1 Napoleon or Fc. 20 = 99.561 grains, 9-10, or 89.605, grains pure gold.
The foregoing is the fundamental basis of foreign exchange,
and with these principles firmly grasped, the various ramifica-
tions of the business are readily understood.
In the early period of international commerce, when each
European principality coined its own money and falsified
and clipped it according to the needs and exigencies of its
petty sovereign, the only international medium of exchange
was the promissory notes of the great merchants of the
middle ages. These notes circulated the year around as money,
and were payable as a rule on certain days at certain cities where
the great annual fairs were held, and were redeem-
Historicai able at fixed values in silver. A striking instance
of the power wielded by these merchant princes is
to be found in the history of the steelyard in London, a settle-
ment of Hansa merchants in the city, making their own laws and
governed only by their own rules and traditions, regardless of
the laws of the land whose hospitality and protection they en-
joyed. The pound of silver was the measure of value, but the
pound of silver was an unknown quantity unless it was desig-
nated in the bond as a pound of silver of the Esterlings, or
strangers — ^hence the origin of the term Pound Sterling, which
454 FOREIGN EXCHANGE.
has subsequently been adopted as the denominational standard of
value of Great Britain. Modern legislation has remedied all the
defects of the earlier systems, but a recital of former conditions
is none the less interesting as an introduction to our present
methods, which are the fruits of evolution and have been placed
upon a scientific basis of fact.
Goods are being transported from one country to another,
and this is the natural method of liquidating an international
indebtedness. This failing, recourse is had to the transfer
of credits arising out of former transactions, and as a last
resort, refuge is had to shipping bullion or minted coin. Let us
Liquidation of f oHow a shipment of hardware from England, val-
internationai ucd at Say $1,000, to South America, where for
nee ness argument's sake it has been disposed of for $2,000.
Instead of remitting the money to England and sending the ship
back empty, the agent of the English merchants purchases hides,
which are forwarded to France, as the best market, and are there
sold for $4,000. The ultimate result of this transaction is that
France owes England a debt of $4,000 which must be liquidated
in either of the foregoing methods. Now the probabilities are
that goods will be forwarded to England and there disposed of at
a profit. We have assumed that this train of transactions has
been carried on by one merchant and his agents, but this is not
the modern wa}^, and it is here that international banking
steps in as the connecting link between each transaction, but the
ultimate liquidation has taken place by the ship-
Banling°"^^ meut of merchandise notwithstanding. In each
case the banker has been called upon to provide
the funds and the buying and selling of the bills of
exchange is what constitutes the liquidation. But, never-
theless, the exchange of merchandise is the essence, hence
it is clearly demonstrated that the economical method of liquidat-
ing an international trade balance is through the sale of com-
modities.
INTERNATIONAL BANKING. 455
This constant interchange of commodities creates credits and
debits and foreign transactions are carried out primarily with a
view to adjusting these balances. The debits are set off against
the credits, and only the balance is left for settlement in money.
A nierchant shipping goods to a foreign port desires reim-
bursement therefor immediately the goods are loaded. He
therefore draws on the purchaser, attaches to the draft
all evidences of the shipment, and negotiates the draft
through his banker. He here incurs a risk that on arrival
the purchaser may be insolvent, or for specious reasons may
refuse to accept the goods, thus entailing loss and perhaps ruin,
consequently this method is only adopted where the shipper is
well acquainted with the purchaser's financial standing. Other-
wise he requires a bank credit — i. e., an undertaking on the part
of a bank that his drafts if drawn under certain
Methods conditions will be promptly paid. We will say the
above shipment was made to Germany, but the
banker negotiating the bill has no use for funds in that country,
but desires the money in London. Now any number of courses
are open to him, which will enable him to place the money to his
credit in London. He can send the bill of exchange to his Berlin
bankers for discount, if it is a time bill, and instruct them to
buy a transfer on London; or he can remit the bill direct to
London and sell it in the open market; or he can have his Berlin
bankers buy French exchange and remit this to London for sale,
or purchase therewith in Paris transfers on London. There
really is no end to the combinations that can be made, but for
all practical purposes there are very rarely more than three,
and those under very peculiar conditions; but the writer recalls
one particular transaction which required the intermediary of
four financial centers before it was brought to a satisfactory
conclusion. This method of adjusting balances
Arbitrage is Called arbitrage, or arbitration, and is quite
common among foreign bankers; in fact by some is
made a special feature of the business.
456 FOREIGN EXCPIANGE.
The parity of exchanges with America as the center, is as
follows:
Sterling 486.65
Germany &5.20
France and Latin Union 518 ^
As the exchanges are above or below these points, they are
said to be in our favor or against us, and this is the only real
indication of balance of trade conditions, as published statistics
are fallacious and more or less misleading. As an instance, let
us take the published Treasury statement of the U. S. for Decem-
ber, 1902, which shows an excess of exports over imports for
the preceding fiscal year of $670,000,000, leaving the impression
that the TJ. S. was at that time a creditor nation, while as a mat-
ter of fact the reverse obtained, as evidenced by the current
quotations of foreign exchange which were all far above the re-
Factors spective mint parities. Trade balances are not the
Determining only factors determining the rates of exchange.
xc ange j^^^gg ^^ interest, general economic conditions and
local causes have also a great deal to do with fluctuations. When
money rules high it attracts a great foreign investment, which
is made use of by so-called finance bills, but at times the opposite
condition prevails and advantage is taken of higher rates of
interest abroad by purchase of time bills in foreign centers for
temporary investment purposes.
Where one country cannot liquidate its debt to another by
shipping what it produces, or returning securities which were
held for investment, or selling its own securities, recourse must
be had to gold shipments, which point is reached when exchange
rises sufficiently above the mint parity to cover the cost of
transportation, insurance and other minor ex-
^°^^ penses. An additional factor is the market price
Shipments . , " , . ^
for gold at point of destination. In view of the
fact that the mint price for gold at all important centers is deter-
mined by statute, this last statement might seem anomalous, but
such is the case nevertheless. The quotations for foreign coins
GOLD SHIPMENTS. 457
varies from day to day in accordance with the desire of the
market to encourage or repel gold shipments. The mintage
price for bar gold is always the same, but often a premium is
paid if there is a scarcity. This applies to England; in France
~^and Germany other methods are in vogue of a more arbitrary
nature, but none the less effectual. England and America are
free traders in this respect, and thus it always is, when gold is
required anywhere in the world, that either of these countries
is called upon to supply the needed metal. As an instance, in
the year 1902, gold shipments w^ere made from New York to
Argentina, although New York owed Argentina nothing. Amer-
ica, however, was heavily in debt to Great Britain, and the latter
country being called on for a remittance, simply turned the
requisition over to the United States. The year previous a
similar course was pursued when France demanded liquidation
of a debt owing by England, and which England was unwilling
to pay. The consequence was that the exchange on London fell
to such a low point that it became profitable to ship gold from
America to France wherewith to purchase English exchange,
and thus was the burden of liquidating the French debt thrown
upon the New York market, while at the rate of exchange pre-
vailing between New York and London, a direct shipment of
gold to the latter point would have been connected with a
serious loss.
It is obvious that in speaking of exchange operations between
two countries, the money of one country must be taken as the
standard or basis, the money of the other being considered as
fluctuating or variable. It is natural and customary to regard the
money of one's own nation as the standard, as a
Exchange Tule, with ouc exception, to which reference will
be made later on. Thus when we read in the quo-
tations that exchange on London is unfavorable, or against us, we
mean that it is at a premium in New York — i. e., a good bill on
London is worth in New York more than $4.8665 per Pound
Sterling. A typical quotation list would read as follows:
458 FOREIGN EXCHANGE.
Sterling, demand 4851^ 60 days, 482^^ 90 days, 48li^
German Marks, demand, 95^% 60 days, 94^ 90 days, 94i2
Francs, demand 6183^ 60 days, 522 J^ 90 days, 5233^
which means that
1 Pound Sterling is worth $4,853^.
4 German Marks are worth 95/^ cents, and (this is the exception
referred to) $1 is worth 5.183^ Francs.
In Germany the quotations would read:
Sterling demand 30.39 (Marks for £1 Sterling).
IT. S. Dollars 4.17 (Marks for $1.00).
Francs 81. 10 (Marks for F. 100).
In France:
Sterling demand 25. 15 (Francs for £1 Sterling).
U. S. Dollars 6. 18 (Francs for $1.00).
German Marks 123.25 (Francs for M. 100).
In the foregoing countries it will be noted that each country
takes its own currency as the standard, with the single exception
of the quotation for French exchange in America.
In England, on the contrary, the foreign countries are the
variable quantities — e. g. :
United States 4.87
Germany 20.89
France 25.15
American exchange is sometimes quoted at so many pence per
$. e. g., 49 13-16d. Eeverting now to the quotations in New
York, everything being equal, and Sterling exchange quoted at
485J, on the basis of the mint parity exchange on Germany
Exchange should be about 94 13-16c. + 1-32%, and French
Parity as
Distinguished exchange about 520 — 1-16%, and the question
from Mint ° ^ _
Parity uaturally arises, why this discrepancy? It is to be
found in the different interest rates prevailing in the respective
centers, which again finds its expression in the exchange rates
for or against. Thus in London the discount rate is 2|%; in
Berlin 3J%; in Paris 2J% — and as expressed in exchange rates,
485i, 2039 and 2515. Thus:
2039 -4- 48525 = 23798 X 4 = 95 3-16 approximately.
48525 -^ 2515 = 5183^ approximately.
BASIS OF EXCHANGE. 459
and in this way we arrive at what is called the parity of exchange
as distinguished from the mint parity — i. e., prevailing condi-
tions are taken into consideration and reconciled.
CHAPTER LIT.
FOREIGN EXCHANGE— Continued.
INSTRUMENTS OF EXCHANGE; QUOTATIONS; THE ARITHMETIC OF
EXCHANGE.
A further factor, and one of considerable importance in its
effects upon trade balances, at least as far as this country is
Travelers' Concerned, is the personal expenditure of travelers
Letters of abroad. It is roughly estimated that this amounts
^'^^^'^ to something like $150,000,000 per annum. In
order to meet the needs of this class, a peculiar instrument
has been called into being — the Letter of Credit, which
is addressed to a certain number of banking firms, and
sets forth that N. M. is the bearer, and is entitled to draw
upon a certain bank, generally located in London, for a specified
amount. Payments as made in different localities, are indorsed
on the Letter of Credit itself, and when exhausted it is returned
Circular Note, ^^^^ ^^® ^^^^ draft. A modification of this instru-
or Travelers' mcut is fouud in the Circular Note, or Trav-
elers' Check, which calls for a specific amount
in IT. S. Dollars, and is payable in various countries at
certain fixed rates. A further important instrument in con-
nection with the Foreign Exchange business, is the Commercial
Letter of Credit, used principally by importers. This is usually
addressed to a firm by a bank or banker, authorizing them to
value on its correspondent for a fixed amount, and engages that
the drafts drawn thereunder will be protected if drawn in ac-
cordance with the terms of the Letter of Credit. The terms are,
as a rule, that the draft should be accompanied by Bills of
Lading, Consular Invoices and Insurance Certificates, showing
460
INSTRUMENTS OF CREDIT. 461
the shipment of goods purchased. The most common instru-
jnents used in foreign transactions are checks or cheques, demand
drafts and time drafts. Checks are most commonly used for pay-
ments on demand. Most countries have legislated
Drafts^ ^"** in favor of this method of transferring funds by
means of the entire abolition, or modification, of the
stamp tax — hence demand drafts are very seldom used. In con-
tinental countries the circulation of a check is limited as to
time, particularly in France, and in order to avoid the possibility
of a change in date the law in that country requires that all
checks be dated in words, thus — August fourteenth, 1903 — in-
stead of Aug. 14, 1903; and in Germany a check must expressly
state that the funds transferred are derived from a balance due
the maker. A peculiar method in vogue of evading the stamp
tax in Germany when it is not possible to make the required
declaration as to funds due, is to issue what is called a delega-
tion— ^i. e., a communication addressed to the beneficiary that a
specified sum will be held at his (the beneficiary's) disposal upon
his application to certain designated parties. This instrument
is not intended for circulation, as its very nature deprives it of
that characteristic. Demand drafts have been almost entirely
displaced by checks and delegations, hence are very rarely used.
They are subject to a tax of J per mille, (JVoo) ^^ most all
European countries, the same as time drafts.
Time drafts on merchants, with shipping documents attached,
enable the purchaser to dispose of the goods by sale before paying
for same, and generally contain a provision where
Time Drafts the documeuts are held as security for the pay-
ment of the draft that in the event of the drawee
desiring to withdraw the merchandise, he can do so upon
payment of the draft, less a rebate of interest at the
official bank rate for the unexpired time. This on the Con-
tinent. In England such a draft may be paid prior to maturity
under a rebate of interest of ^% above the advertised rate for
462 FOREIGN EXCHANGE.
short deposits in the London Joint Stock Banks, which as a rule
is 1J% below the Bank of England rate. Thus should the Bank
of England rate be 3%, the rebate rate would be 2%.
The regular quotations of foreign exchange cover three dis-
tinct classes:
1. Posted rates. These are rates arbitrarily determined by
international bankers in New York for the purpose of adjusting
foreign currencies payable in the United States, and are gen-
erally somewhat higher than the actual rates.
2. Actual rates, are the rates at which bankers will sell
their own drafts, telegraphic transfers, etc.
3. Commercial rates, are the buying rates of bills of ex-
change, etc., issued by merchants in the regular course of busi-
ness. A typical quotation list would read as follows:
Sterling. Tel. Transfers. Sight. 60 days.
Posted rates 487^ 484
Actual 485% 485^ 482%
Commercial 485.40 485 483
Germany.
Actual 95 11-82 953^ 94^
Commercial 3 days 953^ 94)1
France.
Actual 517:^ — 1-32 518^ 620%+l-16
Commercial 3 days 519^ 521>^
It must be noted that the quotations for French exchange
progress by f of 1%, and as the quotations are for so many Francs
and Centimes per dollar, each progression would be the equiva-
lent of :J of 1% in our money, and when it is desired to shade the
rate either up or down, this is done by quoting the rate plus
1-16%, plus 1-32%, or minus 1-16 or 1-32. It must be further
noted that as the foreign denomination in this case is the variable
quantity, the higher the quotation the lower the rate of ex-
change.
Taking the sight draft as a basis, the following calculations
will demonstrate how the quotations for telegraphic transfers
and 60 d/s bills are arrived at; e. g. quotation for sight drafts on
England, 485J, Sight drafts or checks have an average circula-
RATES OF EXCHANGE. 463
tion of ten days, hence the interest accruing on the amount
drawn until presentation for payment is enjoyed by the seller.
With telegraphic transfers, however, which are immediately pay-
able, this benefit falls away, so interest for ten days must be
added to the quotation of sight exchange in order to arrive at
the price of a telegraphic transfer. Thus:
Sight draft or check 485 . 25
+ Int. 10 ds, 8^ approx -37^
485.62)^
Bankers' bills, or where documents are to be surren-
dered on acceptance.
Demand 485.25
Less stamp 24
Interest 63 ds. 2%^ 2.41 2.65
482.60
60 days bills with documents attached which
are to be surrendered on payment of the bill.
Quotation for demand 485 . 25
Less stamp .24
2^ int. 63 days .1-68 1.92
" 483.38
Telegraphic Transfers.
Marks. Demand 95.25
Interest 10 days 8^^ 08
95.83
Bankers' bills, clean commercial bills, or such with
documents to be surrendered on acceptance.
Demand 95.25
Stamp K^ 48
Int. 60 days 3J^^ 5.12 .56
94.69
Commercial bills with documents to be surrendered on pay-
ment under rebate of interest at bank rate in the event of the
bill being paid prior to maturity.
Demand 95.25
Stamp >^^ 48
Int. 60 days A% (Bank rate). . 6.82 .68
94.57
Francs.
T/T*
Demand 5.18.25
Less 10 days int. Z% .43
(517>^ - 1-32 = 517.66). 5.17.82
♦Telegraphic Transfers,
464 FOREIGN EXCHANGE.
Bankers' Bills.
Demand 5.18.12.5
Plus stamp 26
23^^ int. 60 days 1.84 2.10
(520% + 1-16 = 520.80). 5.20.22
Commercial Bills.
Demand 5.18.12.5
Plus stamps 26
Z% int. (bank rate) 60 days. . . 2.60 2.86
(Quoted rate 521^)- 6 . 20 . 98 . 5
In determining the value of time bills, other items of cost
must be taken into consideration, such as commissions to be
paid to bankers abroad for handling the items, etc.
In discounting bills in England it must be noted that the 3
days of grace allowed by law are taken into consideration in
calculating the discount while on the continent, where grace is
also customary, only 60 days are brought into computation.
Days of grace, as applied on the continent, have
Days of Grace relation ouly to the notarial act of protest in the
event of non-payment — i. e. if a bill matures on
Jan. 1 and is not paid, it will not be protested until three work-
ing days thereafter. On the other hand it is customary in Ger-
many, when discounting a batch of bills, to apply the bank rate
on 5 days and the current rate on the remaining days the bills
have to run.
In the foregoing only the three principal, commercial coun-
tries have been considered on account of the limited space, but
the principles as applied are the same in other countries, barring,
of course, local usances. The following calculations based on
actual transactions will demonstrate many of the
Illustration principles laid down in the foregoing pages: A
batch of 90 d/s bills on London, amounting to
£65,000, was bought in the N'ew York market for remittance
to London where the money was immediately needed. The nat-
ural course would be to secure the discount by cable for bills to
arrive — i. e., to go forward by first steamer. Th-e rate received
was 3^%, showing the following result;
ARITHMETIC OF EXCHANGE. 465
Amount of bills £65,000
Less 3^% discount 93 days £587.15
Stamps 32.10 620. 5
£64,379.15
Simultaneously an offer was received from a Berlin bank to
buy 90 d/s bills on London at 2032, or 20 Marks 32 pfennigie
per £, which, price included stamps, brokerage and discount.
However, the money was needed in London and not in Berlin, so
enquiry elicited the fact that telegraphic transfers on London
could be bought at 2048| thus:
£65,000® 2032 = M. 1,320,080
@ 2048^ = £64,433.10
The disposal of the exchange in Berlin being the more profit-
able by £53.15, it was sent there. Another case, where the opera-
tion is reversed —
M. 1,000,000 90 days on Berlin sold in London
@ 2057 £48,615 . 19
Exchange there against sold in New York
@485J^ $235,908.88
If remitted to Berlin for discount and exchange sold there-
against in New York, the result would have been as follows:
90 days bills Berlin M. 1,000,000
Less 3^% disc. 90 days, M. 8125.00
Stamps 500. 8,625
M. 991,375
©953^4-1-64 $235,798.19
By remitting Berlin exchange to London a saving of $110.69
=J Voo (per mille) was effected.
London is the only European open market for gold, hence
the fluctuation of exchange on London in New York is limited
to the actual cost of shipment of bullion and the expense for
interest while in transit, approximating f of 1 per
Fluctuations ^qj^^ above or below the mint parity — whereas in
m Exchange ^ •'
the case of Berlin or Paris exchange the fluctua-
tions have a wider scope, dependent upon the premium charged
or allowed for gold, and have been known to approach a variation
of pretty nearly one per cent, above or below the mint parity.
466 FOREIGN EXCHANGE.
Foremost among the exchange centers of the world stands
London, with the Bank of England, surrounded by a most won-
derful group of Joint Stock and private Banks. The other
European centers are Paris with the Bank of France, and Berlin
with the Imperial Bank. These three institutions stand guard
over the financial destinies of the world, and their
cenfere^' Weekly statements are eagerly scanned by finan-
ciers as the true trade barometer. So sensitive,
indeed is the world of finance that when occasionally a meeting
of the Board of Directors of the Bank of England is extended a
few minutes beyond the usual time this fact immediately be-
comes a cause for apprehension, and it is said that the discussion
of an irrelative subject among the directors after the close of a
board meeting at a critical period almost caused a panic on the
Stock Exchange. These centers are engaged in a constant
warfare, one against the other, and while the hostilities are of a
peaceable nature, the methods employed are quite drastic at
times; still, when a common danger threatens, these three
great institutions are ever ready to extend to each other a
helping hand.
Owing to the peculiar features of the banking laws of the
United States, conditions in this country are somewhat different
and not so easily regulated in times of stress as they are abroad.
Our clearing houses act as a unit and are the determining
factors when decisive steps have to be taken for the protection
of the commercial community.
Gold, as has clearly been demonstrated, performs the func-
tion of settling international trade balances best, and upon refer-
ence to the financial papers of the day it will be seen that there
is constantly a movement of the metal — flowing
of'Goid'^^^°'^ regularly through the arteries of trade, subject
to natural laws as unalterable as those in the
material world, and after having performed its duties in revivi-
fying commerce returning to the exchange centers of the world.
EXCHANGE CENTHESS. 467
only to be ready at a moment's notice to again go forth on its
mission to benefit the human race, by developing the resources
of distant parts of the world, — perhaps the wilds of Canada or
the rice fields of India, or to supply the sinews of great enter-
prises such as transcontinental railroad lines.
INDEX.
PAGE.
Accommodation Paper 278
Agriculture 138, 400
Alaric 29
Alaslja, Purchase of 135
Alexandria 15
America, Discovery of 39
American Colonies 106
American Sliips, Capture of 116
Amsterdam, a Commercial Cen-
tre 53
Amsterdam, a Financial Center. 169
Annuities 383
Anti-Bubble Act 214
Arbitrage 455
Assessment Insurance 383
Assets, Shrinkage of 335
Banlc Clearing House 262
History of, 263; Functions of,
266.
Bank Discount, Desirable Paper
for 274
Bank Scandals 227
Bank War 229
Bank of Venice 34, 168
Banks, Private 245,246
Savings, 246, 247; State. 221,
244, 245; Branches of, 210.
Banking, Colonial 21S
Banking Feature of Foreign
Commerce 449
Bank of England 95, 179
Monopoly of. 180; Divided Into
Two Departments, 182; Notes.
183; Issue Department, 185;
Banking Department, 187; Re-
serve, 188; Keeper of Reserves,
190; Rate of Discount, 192; A
Private Corporation, 193; Man-
agement, 194.
Bank of North America 215, 216
Bank of the United States.. 109, 120
First, 217, 218; Renewal of the
Charter, 221; Second, 223, 224,
225; Jackson's Hostility to,
228; Second, Failure of, 230.
Barbarian Invasion 28
Barter 148
Bear Market, A 394
Berlin Decree 117
Bills of Credit 215
Bills, Documentary 277
469
PAGE.
Bimetallism 166, 167
Black Friday 184
Blount, John 96
Board of Directors 293
Board of Underwriters 362
Bonds 319
Government, 319; Refunding,
320; Coupon, 321; Municipal,
321; Registered, 321; State, 321;
Income, 322; of Private Cor-
porations, 322; Security for,
323; Debentures, 323; Collat-
eral Trust, 323; Foreclosure
under, 325; State, 329; Rail-
road, 332.
Bond Issue, Floating of 323
Bonded Warehouses 415
Classes of, 416.
Borrowing and Lending Money.. 271
Borrowing, Limit of 273
Bounty 440
Branch Banks 175
Britain, Under Roman Rule .. 82
Bruges, a Market 65
Bucket Shops 414
Bulls and Bears 393
Bulls and Bears of the Produce
Exchange 409
Bull Market, A 394
Buying and Selling Stocks 396
By-Laws 294
Carriers of Produce 402
Carthaginian Commerce 19
Call Loans 275, 399
Cape Route, Discovery of 46
Cash Grain 407
Canadian Banking System. .206, 231
Inspection, 207.
Centennial Exposition, 1876 143
Certificates, Gold and Sliver 243
Change of Commercial Centers.. 45
Charlemagne 31
Checks and Drafts 263, 461
Circular Note 460
Civil War, The 131
Clay, Henry 221
Clearinghouse 262
Certificates, 266; Matter for
Clearing, 268.
Clipper Ships 122
Coasting Trade of United States 446
470
INDEX.
,. „ PAGE.
Colbert, Commercial Policy 69
Cold Storage Center 419
Cold Storage Warehouses 418
Commerce, American 439
During Napoleonic Wars, 100;
Revival of, After the Adoption
of the Constitution, 109.
Commercial Agencies 340
Commercial Credits 336
Commission Merchant, The 403
Comptroller of the Currency 235
Confederation, American 108
Coinage 151, 161
Coin, Subsidiary 156
Collection Laws 342
Cotton Gin, The 112
Cotton Industries 133
Co-Insurance 363
Consular Invoices 447
Consular OflScers, Duties of 447
Consular Service 446
Continental Money 108
Cooley, Thomas M 312
Corner 411
Corn Laws 100
Corporations 282
Close, 282; Formation of, 283;
Private, 282; Officers of, 294;
To Control By-Products, 301;
Consolidation of, 308; Insol-
vency of, 314; Credit of, 343.
Corporate Manipulations 302
Corporate Merger, Illegal 303
Corporate Seal 298
Corporate Signature 298
Countervailing Duty 440
Covering 410
Credit Associations 342
Credit, Limit of 336
Currency, Elasticity of 185, 209
Days of Grace 464
Debentures 323
Decay of Commerce 30
Delivery Day 410
Deposits, Removal of by Presi-
dent Jackson 229
Differential Rates 430
Dividends 290
Stock, 290; Fictitious, 290; Il-
legal, 291.
Dominion Notes 212
Drafts, Time 461
Dutch, Character 53
In Possession of Carrying
Trade, 53; Shipbuilders and
Navigators, 53; Commerce in
the East, 54; East India Com-
pany, 54; Colonies in the West,
54.
Dutch Colonial Policy 55
Duty, Countervailing 440
East India Company of England
89, 90, 91
Edict of Nantes, Revocation of. . 71
Egyptian Commerce 14
Eighty Per Cent Clause 363
Embargo Act 117
PAGE. "
Endless Chain, Operation of .... 242
England, Ancient Commerce of. 81
A Manufacturing Nation, 93;
Change from Protection to
Free Trade, 102.
England's Colonial Policy 97, 107
Present Commercial Condition,
105.
English Banking System 95
Growth of Colonial Posses-
sions, 101; Eastern Posses-
sions, 103; Carrying Trade
Prior to 15th Centurv, 80; In*
South Africa, 104; Prohibition
of the Exportation of Machin-
ery, Tools, etc., 107.
English Manufactures 94
English Navigation Acts 93
Equal Mileage Rates 435
Equity of Redemption 352
Erie Canal 120
Exchange, Fluctuations in 465
Exchange Centers 466
Exchange Parity 458
Exports, Colonial 106
Exports and Imports 136, 137
Exposition in New York 129
Factory System, The 98
Fairs of Middle Ages 83, 84
Fall of Rome 29
Fast Freight Lines 437
Feudal System 31, 84, 153
Fire Insurance, Origin of 354
Lloyds, 355; Mutual Com-
panies, 355; Stock Companies,
356; Rates. 357, 360; Basis
Rate, 358; Floating, 365;
Blanket Policy, 365; Owner-
ship, 366; Loss Payable Clause,
368.
Flanders, Commerce of 64
Manufactures of, 64; Decline
of, 65.
Florence 41
Florence. Bankers of 42, 43
Fluctuations in Exchange 465
Foreclosure 317, 3.52
Foreclosure, Fraudulent 318
Foreign Commerce 438
Banking Feature of, 449.
Foreign Exchange 450, 452
French Colonial Possessions 67
French Colonial Trade 79
French Commerce, Beginning of. 65
Recent, 78,
France, Reign of Louis XIV 66
Possessions of, in America, 68;
Colbert as Minister, 66; Con-
flict with England in America,
69; Condition under Louis XV,
72; Bank of, 173, 177; Func-
tions of the Bank, 174.
French Expositions 78, 80
French East India Company . . 66
French Revolution 112
Causes of, 74.
INDEX.
ill
PAOE.
Free Banking 231
Free Warehouses 418
Freight, Classification of 432
Object of Classification, 433;
What the Traffic Will Bear,
434; Cost of Service, 434; Dis-
criminations, 433; Long and
Short Haul, 436.
Freight Rates, How Determined. 434
Competition, 435; Equal Mile-
age, 435.
Freight Traffic 428
Futures 407
Trading in, 409.
Genoa, Conflict with Venice.. 36, 37
Rival of Venice, 37, 38; Com-
merce of, 37.
Genoese Industries 38
Finance and Laws, 38.
German Banking 196
German Commerce 59
Revival of. 60.
German, Development of Home
Industries 61
German Imperial Treasury
Notes 200
German Money System, Elastic-
ity of the Currency 198
Germany, Present Commerce of. 62
Practical Education in, 63.
Glass, Venetian 34
Gold, Discovery of in California. 128
Ebb and Flow, 466; Legal
Value of, 452.
Gold Shipments 456
Government Bonds 328
Grain Inspection 412
Greek Commerce 17
Gresham's Law 159
Hansa, The 56
Hansa Congress 58
Hanseatic League 56
Effect of, 58; Object of, 83.
Hamilton, Alexander 216
Report of, 217.
Hamilton's Financial System .. 109
Hawaiian Islands 144
Henry VIII 87, 88
Holland, Lands Below Sea Level 53
Home Industries, Prior to 1812. . 115
Immigration 113
Implied Powers, Doctrine of, 110, 218
Import and Export Duties 439
Incomes, Purchase of 387
Independent Treasury Act 254
India, Acquisition of by England 92
Industrials, Financing of 309
Inspection of Grain 412
Insurance, Fire 354
Insurance, in Cold Storage Ware-
houses 422
Industrial Insurance 377
Interchangeable Values 453
International Law 445
International I n d e b t e dness.
Liquidation of 454
PAGE.
International Banking 454
Interstate Commerce Law 478
Inventions in 18th Century 99
Inventions 130
Invincible Armada 51, 87, 88
Invoices, Consular 447
Iron and Steel 134
Jacquard Loom 77
Jews, Banishment of 85
Expulsion by Spain, 51.
Kiln Dried Grain 413
Land Bank, John Law's 72
In Boston, 213; of 1741, 214.
Land Tenures !n France 76
In the United States, 141.
Law, International 445
Law, John 72, 73
Law of Probabilities 370
Life Insurance 370
History of, 371; Two Methods,
371; Stock and Mutual Com-
panies, 372; Insurable Interest,
372; Policies, 373; Limited Life
Policies, 374; Endowment Pol-
icies, 374; Joint Life, 376; Pre-
mium Loan, 376; Payment of
Premiums, 378; Dividends, 378;
Incontestability, 380; Non-For-
feiture, 380; Loans, 381; As an
Investment, 381; Surrender
Value of Policies, 382; An-
nuities, 383.
Light Houses, Buoys 443
Lisbon, a Commercial Center ... 48
Port of. Closed, 52.
Listing Securities 395
Loans, on Collateral 275
Speculative, 276; on Real Es-
tate, 280.
London, a Financial Center 178
The World's Clearinghouse,
178.
London Stock Exchange 385
Long 394
Longs and Shorts 410
Long and Short Haul 436
Loss Claims 368
Loss Payable Clause 368
Louis XIV, Persecution of
Huguenots 70
Louisiana, Purchase of 113, 114
Manufacturing Bonded Ware-
houses 417
Margins 404
Buying on, 389, 397.
Medlcis, The 42
Medium of Exchange 149
Merchant Marine 123
Mercantile Agencies 341
Reports of, 342.
Merger, Illegal 303
Mexican Cession 127
McKinley Bill, The 139
Milan 43
Mint, Establishment of Ill
Mint Parity 453
472
INDEX.
PAGE.
Mississippi Company, The 73
Money 147
Essentials of, 151; An Instru-
ment of Commerce, 152; A
Medium of Excliange, 153; A
Measure of Value, 153; A
Standard of Value, 154; A
Store of Value, 156; Paper,
Kinds of, 158; Representative,
160; Volume of, 162, 176; Sub-
stitutes for, 163.
Money Market 272
Monometallism 165
Moors, Expulsion of 50
Mortgages 333, 334
Recording of, 353.
Mortgages, Farm . : 334
Mortgage Securities 331
Mortgage and Trust Deeds 351
Morris, Robert 215
Napoleon's Policy 75
Napoleanic V^ars, Effect of 116
Napoleon III 77
National Banking Act 257
National Banking System ..233, 234
National Debt 124
National Reserve 241
Navigation Acts 102
Navigation and Tonnage Acts.. 441
New York Stock Exchange .385, 386
Ninety-Nine Year Leases 349
Norman Conquest 84, 85
Note Brokers 278
Notes, United States 242
Notes, Convertible and Incon-
vertible 160
Circulating, 175; Redemption
of, 176.
Order in Council 117
Over-Certification of Checks 398
Pacific Railroad 135
Packing Goods 448
Panic of 1837 125,231
Of 1857, 129, 130; of 1819, 226;
of 1873, 138; of 1893, 268.
Paris Bourse 385
Partnership, Credit of 343
Peel, Sir Robert 181
Petroleum 134, 135
Philippine Islands 145
Phoenicians as Navigators 145
Piracies 83
Pisa 40, 41
Pooling 427, 428
Portuguese Trade 47
Postal Aid Law 442
Postal System, Origin of 94
Precious Metals, as Money 50
Preferred Stock 286
Creation of. 287.
Private Banks 245, 246
Private Warehouses 417
Produce Exchange, The 400
Produce Exchange Centers .... 401
Produce Exchange, Benefits of . 406
Organization of, 402.
PAGE.
Prohibition of Colonial Manu-
factures 107
Promotion 310
Protective Duties 121, 122
Punic Wars 20, 21
Purchase and Sale of Real Es-
tate 345
Puts, Calls and Spreads 394
Queen Elizabeth 87, 88
Prosperity, 89; Monopolies un-
der, 89.
Railroading 423
Railroads 126, 140
Ownership, 425; Capitalization,
425; Efficiency, 426; Consolida-
tion, 426; Pooling, 427, 428.
Railway, Associations 427
Rates of Exchange 456
Ratio 165
Real Estate, Titles 345
Surveys, 346; Subdivisions, 347;
Values, 347.
Real Estate Contract 349
Receiver 313
Duties of, 313; Friendly, 314.
Receiverships 315
Receivers of Produce 402
Reciprocity 139, 140, 144
Recording Deeds and Mortgages. 353
Refrigeration 420
Regulator of the Currency. .223, 227
Reichsbank 197
Controls other Banks, 200.
Reorganization of Corporations. .326
Committee, 316; Methods of,
316.
Reserve 238
Revolutions, Period of 98
Rialto, of Venice 35
Roman Industries 22
Roman Supremacy 22
Roads, 23; Commerce, 24;
Slavery, 25, 26.
Russian Money System 201
Russian Bank, Branches of 202
Russian Loans 203
Russia, Imperial Bank of 201
Safety Fund System of New
York 230, 231
Savings Banks 246, 247
Mutual. 248; Private, 249.
Saxons, Normans and Danes 82
Scotland, Banking System of . .204
Elasticity of Its System, 204;
Cash Credit Accounts, 205;
Branch Banks, 205.
Securities 328
Local, 330; Mortgage, 331;
Speculation, 384.
Securities, Companies 303
Second United States Bank 124
Sereno S. Pratt 387
Shipbuilding 106
Ships, Registration of 443,444
Entrance of, 450; Clearance of,
451.
INDEX.
473
PAGE.
Ship Captains, Discretion of 443
Shippers of Produce 402
Short 393
Signed Statements 341
Silver, Demonetization of 157
Sinking Fund 292
Slavery 121
South Sea Bubble 96
Spain, Decay of Commerce 51
Treatment of Dutch, 52; Treat-
ment of Cuba, 52.
Spanish Colonial Policy 50
Spanish Commerce 49
Specie Payments, Suspension of. 222
Resumption of, 137.
Speculation, In Securities 388
Is it a Benefit, 388.
State Banks 129, 244, 245
State Bonds 329
Steam Engine 102
Steamboat, First 114
Stock 285
Watered, 288; Fluctuations in,
391; Preferred, 286; Treasury,
287.
Stock Broker 393
Stock Exchange, The 384
A Place for Investments, 386;
A Market for Securities, 386.
Stock Gambling 390
Stocks 333
Storage and Warehousing 415
Storekeeper 416
Subsidy 441, 442
English, 442; French, 442;
United States, 442.
Subsidiary Corporations 300
Sub-Treasury System 241
Sub-Treasuries 258, 260
Suffolk Bank System 230
Surplus 292
Tariff and Tonnage Acts Ill
Telegraph 126, 127
Tickers 399
Tonnage Laws 122
Trade Follows the Flag 443
„ PAGE.
Trade Marks 448
Trade News, Prices Based On.. 405
Trafllc Associations 427
Tramp Steamers 442
Transportation by Rail 423
Development of, 424.
Travelers' Check 460
Travelers' Letters of Credit 460
Treaties, Kinds of 445
Treasury Stock 287
Treasury Notes 255
Trust 305
How Formed, 307; Illegal, 308;
Powers of, 307.
Trust Companies 249
Functions of, 250.
Time Drafts 461
Underwriting 310
United States, Present Com-
merce 145, 146
United States Bank, First.. 217, 218
Branches of, 219; Renewal of
Charter of, 221.
United States Treasury 252
Establishment of, 253.
Usury, A Crime 38
Values, Interchangeable 453
Venice, Sources of Wealth 33
Decline of, 36.
Venetian Commerce 33
Venetian Manufactures 33
Venetians, Originators of Science
of Double Entry Book-Keeping 35
Viscontl of Milan 45
Voting Trust 303
Wages, Rate of 144
Warehouse Receipts 277
As Security, 421.
Watered Stock 288
Wild Cat Banks 231, 232
WIsselbank 171, 173
Wool, English 85
World's Columbian Exposition,
1893 143
Zollyerein, The 61
y^
THIS BOOK IS DUE ON THE LAST DATE
STAMPED BELOW
AN INITIAL FINE OF 25 CENTS
WILL BE ASSESSED FOR FAILURE TO RETURN
THIS BOOK ON THE DATE DUE. THE PENALTY
WILL INCREASE TO 50 CENTS ON THE FOURTH
DAY AND TO $1.00 ON THE SEVENTH DAY
OVERDUE.
mi 1** 1^^^
^fHU 1¥ 1935
^*5r j-T ^^^
OCT 16«39
JAN 20 194R
LD 21-100m-7,'33
3r
VC 0573b
"^ I -b"-!